Investors have fled shares of retail chains in droves of late, scared away by the prospect of decelerating economic growth. They've left behind some winners, cheap stocks with strong fundamentals and rosy outlooks, one fund managers thinks.

Kohl's

(KSS) - Get Report

,

Limited Brands

(LTD)

and

Best Buy

(BBY) - Get Report

are ripe for the picking, said Steve Neimeth, portfolio manager of AIG SunAmerica's Growth & Income fund, which owns all three stocks. Neimeth says all three are currently reaping the benefits of past and present growth in their respective sectors, and each has coffers lined with cash.

"Investors are very concerned about the strength of the consumer and consumer spending for the second half of this year and next year, largely as a result of lower equity cashouts of mortgages and anemic job growth," Neimeth said. "As a result of these concerns, stocks are trading at low valuations, and fully discount the possibility that the economy's recovery is less robust."

Neimeth's bullish stance stems from the improvement in earnings he expects in 2005. Wall Street will likely agree come September, when stronger-than-expected back-to-school sales are released, he predicts. That, in turn, should "set the tone for the group in the next six to 12 months."

Indeed, a recent survey conducted by BIGresearch for the National Retail Federation found that families with school-aged children will spend 7.2% more this year on back-to-school items.

Limited, for one, is ready to take advantage, said Neimeth. Its previously waning Express and Express for Men brands are turning around. In addition, its two leading brands, Victoria's Secret and Bath & Body Works, should continue to help carry the company, each having generally reported big gains in monthly same-store sales this year.

For example, in June, a weak month for retail sales, Bath & Body Works posted a staggering 55% jump in same-store sales, while Victoria's Secret's results were up 6%. Consolidated Limited Brands' same-store sales rose 19%, ahead of the First Call consensus for a 14% increase.

Skeptics say the chain could still fumble its product mix. Howard Tubin, an analyst at Cathay Financial, notes that Bath & Body Works is planning to roll out new products in August, September and October, while Express is boosting its wear-to-work category inventory. With that much change at hand, Tubin said, there's always a risk the merchandise won't resonate with shoppers.

At around $20, shares of Limited are up about 20% year over year and are trading at 14.3 times expected 2005 earnings of $1.43 a share. That's slightly below the company's close competitor,

Gap

(GPS) - Get Report

, with a forward price-to-earnings ratio of 14.50.

"The expectations are low, yet

Limited has two brands that are extremely dominant," Neimeth said, adding that "20% of their market cap is cash on the balance sheet." At year-end 2003, Limited had $1.062 billion in cash, up from the prior year's $795 million. Because of that, he says, Limited shares are really trading at 11 times forward earnings, low for its expected growth.

At around $48, shares of Best Buy are up about 12% in the last 52 weeks and trading at 14.2 times expected 2005 earnings of $3.36 a share. Rival

Circuit City

(CC) - Get Report

is less of a bargain, trading at a 24.6 times expected 2005 earnings of 57 cents a share. At around $14, the shares are up 52%, year over year.

However, "If

Best Buy just maintains its current lower run rate or the improved consumer comes back, the stock could do very well," Neimeth said.

The company's customer centricity program could be a significant catalyst to bolster sales and profit, he said. The program, which Best Buy itself forecast will contribute to several more years of double-digit top-line growth, is currently being rolled out to 70 to 74 stores.

But Tubin said that very program could be a risk for Best Buy. "They've already somewhat pulled back the reins on that," he said, citing the company's previous plan to affect the automation campaign in more than 100 stores. Best Buy said the gains it had seen from an earlier test had moderated.

Factoring in $7 a share in cash, Neimeth estimated, Best Buy is trading at 12 times earnings. "I'll take my chances," he said. "Eighteen times earnings worries me."

Further proof of Limited's and Best Buy's strong financial positions is that both have boosted dividends recently and announced share buybacks. In the consumer sector overall, buybacks -- a characteristic of mature consumer companies -- have increased regularly over the past year, while quarterly dividends have been expanding.

"Companies that continue to allocate their free cash flow toward share repurchases and dividends are likely to perform better than those that are making acquisitions," Neimeth said, citing the higher risk that comes along with acquisitions.

Finally, recently troubled department store chain Kohl's, which hasn't had a recent dividend but could be planning one, looks attractive to Neimeth. Not only is its turnaround taking a firm hold, the company is poised to seriously increase its store base in the next three years.

Expansion is where Kohl's is spending its roughly $99.8 million in cash and cash equivalents. The company sees about 190 new stores in 2004 and 2005 combined. As of May 1, it had 589 stores.

"Merchandising and inventory problems appear to be behind them," Neimeth said. "The initial read on the fall lineup is very positive. Inventories are at record lows, which bode very well for profitability."

Growth is important to this story. Kohl's shares, at around $46, have a P/E ratio of 17.9, based on expected 2005 earnings of $2.57 a share; the shares are down about 20% from last year. In comparison,

Target

(TGT) - Get Report

trades at 16.85 times expected 2005 earnings of $2.56 a share and its shares are up about 15% year over year.

One challenge that could hold back Kohl's shares would be if sales in the second half of the year do not rebound as expected, said analyst Mark Miller of William Blair & Co. "We'll know with more confidence what that second half looks like as we get into the back-to-school selling season," said the analyst who has an outperform rating on the company. (William Blair does investment banking for Kohl's and owns 1% or more of the company's securities.)

Of course macro risks also remain for each stock, especially due to the inherently cyclical nature of the consumer sector. The potential weakening of consumer confidence is a big one. "If jobs creation doesn't improve or slows, then the group is not likely to outperform the broader market," said Neimeth.

For his part, Tubin thinks fashion apparel retailers like Limited are less dependent on the broader environment. "Clothing retailers can drive their own business by offering the right fashion," he said. "In the past, they've generated good results even in a more difficult environment if the fashion has been right." (Cathay Financial does not do investment banking for Limited or Best Buy, and Tubin does not own shares of either.)

In the end, "long-term investors have a unique opportunity to purchase higher quality retailers at low valuations in anticipation of better fundamentals in 2005," said Neimeth.