(FORTUNE Magazine) – No question, small-cap funds have been hot. Among the hottest is the $244 million Al Frank (VALUX) fund. Launched in 1998 by the publishers of the widely respected Prudent Speculator newsletter, its five-year average return of 27% ranks fourth out of 142 U.S. small-cap funds. That success is hardly a big surprise. The Speculator itself has a 22% average return since its inception in 1977. We asked lead manager and newsletter editor John Buckingham to give us the outlook for small-cap stocks, explain why he likes tech, and tell us what it's like to (almost) share a name with a popular comedian. --David Rynecki

Can the rally in small caps continue?

Absolutely. Small caps offer more bargains because many of the companies are obscure and illiquid. But there are not as many bargains as a few years ago. If small caps were 90% of the bargains last year, they're now 60%.

What moves are you making?

We're not changing anything about how we pick stocks. We look for companies with low P/Es, low price-to-sales ratios. We focus on inexpensive stocks that have good growth potential.

Where does that point you?

Homebuilders are a good example. There's still fantastic value in a company like Beazer Homes (BZH, $107). You have a P/E of seven, and in my opinion earnings are going to continue to grow at double digits.

What else are you buying?

An example is Keynote Systems (KEYN, $13), an Internet benchmarking company. It has $9 a share in cash, no debt, and it's not burning through cash.

Aren't you scared of tech valuations?

No, I like a lot of technology. Our fund has been 40% to 50% tech since it began in 1998. We like tech because it is so volatile that we can buy companies at fire-sale prices. The great thing about tech is all the yo-yos who buy when a company announces a contract in China and double the stock even if the deal doesn't bring any revenue in. You are relying on the stupidity of investors out there who are going to get excited about technology stocks at the first sign of positive news.

We notice you also own some big caps like General Electric.

And Exxon and AIG and Pfizer. We see value in these companies.

Aren't you supposed to just buy small caps?

No. Morningstar calls us a small-cap fund, but that's their definition. What we do is look for undervalued stocks no matter what category they fall into.

Is that the key to your success?

Our founder Al Frank had a philosophy of patience and selection for profits and tranquility. We have 430 stocks in our fund. The majority of our stocks are micro-small, even nano. It's less about picking the 20 greatest stocks and more about picking 400 great stocks and having 100 go down and 300 go up.

Speaking of your founder, do people ever confuse your fund with the work of satirist Al Franken?

We've had calls from people who think there's a connection. But we've been around longer than he has. Maybe we should try to partner with him.