Fund Manager Sees Growth in Retail, Semiconductors

When the economy slows, growth becomes a precious commodity.

"Growth stocks don't depend on the economic cycle to increase earnings, so they tend to outperform in a slowing GDP or economic environment," says Chris McHugh, portfolio manager for the $1.4 billion Turner Midcap Growth Fund (TMGFX Quote). "In addition, at this point in the cycle, the valuations are extremely attractive relative to growth expectations."

McHugh's fund, which has a four-star rating from Morningstar, has returned an average of 13.6% annually over the past five years, five percentage points better than the S&P 500. Year to date, the fund is down 5%, compared with a 6.5% drop for the benchmark index.

"Value has done well over the past five years, but the bulk of earnings has come from materials, financials and energy," says McHugh. "We think the run in materials and energy is peaking. Financial stocks, usually the biggest component of value indices, have clearly peaked and earnings are under severe pressure."

Retail stocks have also been feeling the strain with rising oil prices and falling home prices suffocating shoppers. But McHugh believes he's picked up a pair of winners at the mall: Guess? (GES Quote) and Urban Outfitters (URBN Quote).

"Guess? has been successful in the U.S., but the international expansion has really enabled the company to beat and raise estimates in a tough retail tape," says McHugh. "They are doing fabulously in Italy and also in China and the emerging markets where customers are becoming very brand conscious."

As for Urban Outfitters, McHugh says each of their three main concept stores -- Urban Outfitters, Anthropologie and Free People -- can double their store base over the next three to five years given a 20% EPS growth potential. He calls their Internet sales, now over 17% of revenue, a "hidden gem."