(FORTUNE Magazine) – It's spring, and Tyler Smith is anxiously awaiting a burst of new sprouts from the bulbs he planted last year at his Weston, Connecticut, home. Smith's other green thumb has already worked wonders for shareholders of Alliance Growth fund, which has returned an average of 24% annually over the past three years, about double the S&P 500's performance. Smith reaps those big gains by focusing on stocks with superior growth prospects. In an interview with FORTUNE's Shelley Neumeier, Smith tells where the next big payoffs should be.

What's your strategy? We look for companies with prospects for above-average earnings growth, but we don't focus on ones with sterling long-term records. We're trying to find companies where the next few years will be better than the past. That way you not only profit from earnings growth, but you can also get an expansion of the P/E multiple. We have a strong value orientation, so we don't have a lot of money in high-P/E stocks.

What kind of stocks fit your criteria? The best example right now is Sears Roebuck, which forfeited its growth credentials ten or 15 years ago. Now the company is restructuring: It spun off Dean Witter and brought in an outsider, Arthur Martinez, to run the merchandise division. So far the results have been gratifying. Sales and earnings are both doing better than expected. We think there's a good probability Sears will go public with Prodigy, its on-line service, and it may also spin off its real estate division, Homart, as a REIT. With the stock down to $48, you're paying ten times expected 1994 earnings. If you get a Prodigy spinoff and a REIT spinoff, that alone would get you a handful of points on the stock. Over the next year you should be able to make a 25% return or more on Sears shares.

Chrysler and General Motors are among your largest holdings. Do you see more upside for these stocks? We have always tried to keep part of the portfolio in things that are timely. Right now the trend is with cyclically sensitive stocks. The autos seem to be the strongest part of that sector, and there are positive things going on here beyond just this auto cycle. The cars are better, the management is better, and the companies are financially stronger than they were in the last cycle. The stocks are up, but we still think both Chrysler and GM will continue to outperform the market.

You have 40% of your portfolio in financial stocks. Why? We've put about 13% in REITs in the past few months. These shares are not as vulnerable to rising interest rates as other financial stocks. The REITs that we own have been developers for ten or 20 years and have made it through the real estate downturn in reasonably good shape. Also, so many REITs have gone public recently that they had to lower prices to get the deals done. We are getting yields between 7% and 9%, and these companies can still raise their dividends between 5% and 15% a year because of increasing rents. We bought between 15 or 20 IPOs over the past few months, including JP Realty, which owns shopping centers in the Mountain States. It yields 7.25%. If you get a yield of 8%, and dividend growth of around 10%, these stocks should give you close to a 20% return over a year.

What about your other financials? We own several insurance-related companies that we like for reasons that have nothing to do with interest sensitivity. John Alden Life Insurance is one of the largest providers of health care insurance for very small groups. The company has been growing close to 20% annually over the past several years. Now it has targeted 20 small cities in which it wants to establish a relationship with hospitals and doctors. At $39 per share, it has a P/E of 11, but earnings should grow 15% or more for the next several years. We hope to get some multiple expansion along with the earnings growth, which means the stock should return close to 20% a year over the next several years.

Does anything look good in the technology sector? The two big companies that we own a lot of are Motorola and Intel. ((For more on Motorola, see Corporate Performance.)) Intel has a powerful position in thesemiconductor market, and Motorola's new PowerPC chip won't blow them away. Intel stock still sells for only ten times earnings. Motorola is just in the middle of the exploding arena of wireless communications. The company's earnings should grow at a rate in the high teens or better, and the stock should track that. We've also added to the technology area with stocks like EMC, General Instrument, Novell, and Cisco Systems. These are all computer- related stocks with 20% to 30% annual growth in earnings. People consider technology issues growth stocks, but I think of them more like modern cyclicals. This is the area of the economy where there's the most rapid growth, and as the economy improves, they should do well.

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CHART: NOT AVAILABLE CREDIT: FORTUNE CHART CAPTION: ONE OF HIS PICKS: SEARS ROEBUCK