(FORTUNE Magazine) – Nobody loves a good game of tennis more than Graham Y. Tanaka. Says he: ''It's a great workout, the competition is exciting, and the game is very social. You get to know people as you play.'' For Tanaka, socializing is a critical part of his job as well. The 41-year-old president of Tanaka Capital Management in New York City visits with the executives of more than 300 companies a year, looking for undervalued stocks. That personal contact worked like an overhead smash last year as his average account bounced up 53.8%. Over the past ten years, money run by Tanaka has handily beaten Standard & Poor's 500-stock index. Tanaka recently spoke with Fortune's Andrew Serwer about the stocks he considers his next aces.

You own very few stocks. Why not diversify more? We own fewer than 20 stocks at any given time because we are looking for very special stocks. We want to buy companies where there is some fundamental change going on that is not yet reflected in the earnings or price. Right now we are looking for companies that have double-digit growth in sales with solid control over their pricing so they can pass on costs and continue to raise unit sales. We want stocks that will produce 15%-per-year earnings growth.

Aren't stocks like that awfully expensive? The stocks I'm talking about are selling for only 10% to 20% premiums to the market P/E multiple. Many of our favorites have had a slip-up recently, which made them even cheaper. We think that they will sell at a bigger premium to the market once Wall Street recognizes their potential.

Can you name names? Yes. Our biggest holding is Federal National Mortgage Association. The perception is that the S&L and real estate crunches have hurt the company, and the stock has been banged up. But Fannie Mae has instituted a whole series of controls that make it a lot less vulnerable in times of duress. I think Fannie Mae will increase earnings 15% per year. Returns from its mortgage portfolio should grow about 6% per year, but its mortgage-backed security business, where the company takes existing mortgages, packages them, and sells them to Wall Street, is growing more like 20%. The S&Ls are under pressure to sell mortgages, and Fannie Mae is out there to buy them.

Do drug companies have the kind of pricing power you're looking for? They sure do. These stocks are a little expensive, selling for 20% to 30% above the market P/E multiple, but I think they'll go to twice the market multiple within the next five years. We own Pfizer and American Cyanamid, which owns Lederle Laboratories. Pfizer has been lagging lately because it has been investing heavily in new products, such as an arthritis treatment and a drug that could help AIDS patients, which should be coming out in the next couple of years. We may be early with this stock, but we are very patient. Lederle has a new antibiotic called Suprax, which has already hit the marketplace. It should have earnings growth of 15% to 20% for the next several years. Another of our largest holdings is Humana, which is getting over some recent troubles and is the lowest-cost provider of hospital care. Humana has the demographic lift of an aging population in its favor.

Have you spotted any other good demographic plays? Outboard Marine is the leading maker of outboard engines and has a large share of the boat business too. It's a cyclical market, but the demographics will be very favorable over the 1990s, since baby-boomers will be hitting the peak boat-buying years with plenty of disposable income. Outboard has spent $100 million on new plants, which is a lot for a company this size. It is now by far the lowest-cost producer in the world.

Any more low-cost producers? Airborne Freight. It is the third-largest domestic overnight package deliverer after Federal Express and United Parcel Service, and it's gaining. It's the lowest-cost provider because it limits its service to large companies and avoids the high-cost residential business, which can drain profits. I * think Airborne will have annual earnings growth of 25% for the next five years. Even after the recent run-up, the stock still sells at only ten times estimated 1990 earnings.

Is high tech dead? High-tech stocks really didn't deliver in the 1980s, so Wall Street is skeptical. One company we think will prosper is Intel. It will continue to come out with better-performing microprocessors and be able to control its pricing better than it has previously. What has always hurt Intel and others is second-sourcing, which means that the company had to give away blueprints of its products to competitors to provide a second source of the product. But by promising future price declines for its chips, Intel has been able to strike a number of single-source agreements with its customers.

How about smaller technology stocks? National Data is a medium-size company that we think could become one of the premier growth stocks of the 1990s. It is a computer services company that processes high-volume, repetitive transactions, such as credit card authorizations. It has a leading share of that business and is growing. National is also at the forefront of another expanding business -- providing electronic health-claims processing services for pharmacies, hospitals, and insurance companies. National has the best technology and the biggest system in the country. Through acquisitions it will continue to achieve even greater economies of scale than it enjoys today.