Unlike other large-cap value fund managers, Matt Norris, of the Ivy Value Fund, is less sanguine about the market. "I'm not blinded by the valuations," he says. "Companies look cheap, but business fundamentals are weak and will stay weak for a while. Valuations won't save stocks if business fundamentals don't change."

Norris looks at stocks based on gross cash flow yields before capital expenditures. His average holding is growing cash flow at almost 9%. Meanwhile, the stocks are selling at just 1.8 times book value. Historically, Ivy's holdings have grown earnings at nearly 20%, Morningstar says.

In these uncertain economic times, Norris wants to own companies that are spending money wisely. But the companies must be selling at attractive price-to-book values. That has put him in insurance companies such as Travelers and Allstate. He also likes drug distribution companies, such as AmerisourceBergen Drug Corp., because the businesses are stable and experience inelastic product demand. In addition, he's buying Home Depot and JCPenney because these companies should perform well when the economy recovers.

Managers on the small-cap value side are also finding bargains. Mark Leslie, manager of the William Blair Value Discovery Fund, looks for the best ideas in each market sector. "We are finding opportunities in today's market," Leslie says. "In markets like this, we focus on companies that have a catalyst for change, like new management or restructuring. These types of moves will drive higher value for companies."

Leslie says small-cap performance runs in streaks of several years. Small-cap stocks have outperformed other asset classes over the past several years. So these stocks could lag larger stocks over the near term. Meanwhile, he was using the pullback to buy stocks with strong cash flow, strong balance sheets and strong return on invested capital. He is underweight in financial stocks and overweight in industrials and technology.

He's been accumulating shares in companies such as Varian Inc., which sells scientific instruments to health care and industrial companies. The company's profit margins are expanding. Another pick, Flowers Foods, produces bakery products. Although wheat prices are soaring, this company's hedging program locks in lower prices. Minerals Technologies makes coatings for paper products. A new CEO came on board last year and improved cash flow and return on capital, cutting back on poor projects and buying back stock.

Leslie is optimistic about the longer term and is fully invested. His average holding is selling at just 1.7 times book value, and cash flows are growing at 9%, while earnings are growing at about 20%, according to Morningstar.

Although earnings expectations are uncertain, many companies held by the fund report that inventories are being managed aggressively, that backlog growth is slowing and that order logs are positive, he says. "We are in for some short-term volatility and downside expectations until we get into the second half of the year, when the economy gets stronger. We are taking a hard look at cyclicals," he says.

Meanwhile, John Montgomery, manager of the Bridgeway Small-Cap Value fund, says his proprietary model is turning up values in business services, financial services and industrial materials. According to Morningstar data, the fund's average holding is selling at just 13 times earnings, while earnings are growing at 23%. But his average holding sports a price-to-book value of just 1.7. The companies are growing cash flows at 23%, and book values are growing at 14%.

This small-cap fund, up 7% last year, outperformed the Russell 2000 value index. But in the last quarter, his stocks dropped about 4%. Investors abandoned small company stocks in favor of large company stocks because of the deterioration of the economy.