A get-rich plan: 'Living-large stocks' - ANGELA BARNES

Investing in stocks that cater to the rich has been a good strategy for investors and should continue to be successful in the coming years, a Citigroup report said yesterday.

"In many ways, it often pays off handsomely to sell to or serve upper-income Americans more than it pays to concentrate on all Americans," wrote Tobias Levkovich, chief U.S. equity strategist at Citigroup Global Markets Inc. "In this context, we continue to believe that a portfolio of stocks where the main business focus is on wealthier Americans (though not necessarily the ultrarich) should continue to do well in the foreseeable future." The top 20 per cent of Americans spend almost five times that of the bottom 20 per cent of the population, Mr. Levkovich said. Furthermore, the top 20 per cent's net worth is rising at a considerably faster clip than those of other Americans.

Citigroup has made up a basket of "living-large stocks," including jeweller Tiffany & Co., fashion retailer Saks Inc., Royal Caribbean Cruises Ltd., Las Vegas casino operator Wynn Resorts Ltd. and Orient Express Hotels Inc.

The luxury stock basket has consistently outshone the Standard & Poor's 500-stock index since the start of 1996 but the gap between the two really started to widen in 2003 and is exceptionally wide at the moment. The Standard & Poor's 500-stock index gained 6 per cent in the first six months of this year while the basket of the luxury stocks increased 14.5 per cent.

Mr. Levkovich noted that many of the companies included in the basket generate margins that are impressive when weighed against others in the same industry but which cater to much lower-income customers. "Tiffany & Co. margins trump those of Zale's handily and the same can be said of Steiner Leisure versus Regis or of Orient Hotels versus Marriott," he said.

Mr. Levkovich is not the first Citigroup strategist to suggest investing in stocks that cater to the rich. But he uses a lower standard for what constitutes rich. He refers to the top quintile of Americans, whereas Ajay Kapur, who last year was the head of Citigroup's global equity strategy, referred to the top 1 per cent, the superrich. Mr. Kapur, who has since left Citigroup to start a hedge fund, coined a word "plutonomy' to describe countries, such as the United States, Britain, Australia and Canada, where the spending habits of the ultrarich are powering economic growth and thus preventing those economies from slowing as much as might be expected in the face of surging oil prices. He constructed an index of stocks based on that theory, but the index is no longer being tracked.