Can Coach keep beating the socks off Wal-Mart?

As basic investment advice, it’s pretty hard to argue with “follow the money.”

As the rich have gotten richer worldwide in this decade, so have many companies that cater to them -- including investment managers such as Goldman, Sachs & Co., luxury goods marketers such as Coach Inc. and sports car maker Porsche.

On Wall Street, Coach versus Wal-Mart Stores Inc. hasn’t been much of a contest since 2000. The high-end leather goods maker’s stock price is up 1,326% since then; shares of Wal-Mart, the retailer to the masses, are down 9% in the period.

The fortunes of those stocks seem to speak volumes about one of the great societal issues of this era: the widening gap between the rich and everyone else.

For investors, however, the question is whether that theme may have become overwrought. Nobody doubts that the rich still will be with us, and spending -- of course they will. But as investment ideas, could the companies that cater to the upper crust be less compelling now than companies that cater to folks much further down the income ladder?

So much has been written about the concentration of wealth among the nation’s top income earners that each additional revelation about the trend risks sounding like a parody.

Last week, the investment magazine Alpha published its annual list of the biggest earners among managers of hedge funds, those investment pools for the well-off. Befitting the hedge fund chiefs’ status as Wall Street’s new magnates, the top 25 earners among them took home an average of $570 million in compensation last year.

That’s a lot of Porsches, and a lot more Coach bags.

Porsche, in fact, says it sold 36,095 cars in North America last year, up 7% from 2005 and its third consecutive record-breaking sales year.

By contrast, Ford Motor Co.’s U.S. sales fell in 2006, continuing a decade-long trend. And things aren’t looking much better this year.

Yet for Ford and other companies that depend on the financial health of the average consumer, there is one hopeful sign: Their potential customers are doing better in the paycheck department lately.

“Wage income has begun to rise more rapidly,” notes Peter Kretzmer, senior economist at Banc of America Securities in New York. More rapidly, at least, than the snail’s pace of increases from 2001 to 2004.

Average weekly earnings of U.S. production workers rose 4.4% in the 12 months through March, according to the Labor Department. That was up from a 3.8% increase in the 12 months ended in March 2006 and a mere 2.6% in the period before that.

The government’s broadest measure of worker incomes showed a 1.1% rise in wages and salaries in the first quarter, the biggest increase in six years, according to a Labor Department report Friday.

The rebound in wages is attributed in part to the relatively tight job market. Some companies are having to pay up to get the help they need.

So it isn’t a coincidence that workers’ wages are gaining while corporate earnings growth overall is slowing.

Labor’s share of the national income pie has shrunk in this decade while the share claimed by business has jumped. Rising wages suggest that a reversal may be underway.

“If we don’t have a recession, I would suspect that labor’s share will grow,” said John Silvia, chief economist at Wachovia Corp. in Charlotte, N.C.

And that, in turn, could be good news for companies like Wal-Mart. “Follow the money” could mean follow it into the paychecks of average workers, and from there into goods and services that the wealthy wouldn’t know much about.

It’s noteworthy that the corporate buyout artists at Kohlberg Kravis Roberts & Co. decided last month to shell out $6.9 billion to take discount retailer Dollar General Corp. private. As in the case of Wal-Mart’s stock, Dollar General’s had been a loser since 2000.

Looking down the wealth ladder, Patrick Dorsey, director of stock research at Morningstar Inc. in Chicago, sees opportunity in companies such as CarMax Inc., the largest U.S. retailer of used cars.

Dorsey says he has no beef with the idea that luxury-related companies have a bright future, particularly given the rising middle and upper classes in China, India and elsewhere overseas.

And for many companies serving the high end of the market, rich is relative. Coach, after all, sells not only to the truly rich but to those who aspire to be rich -- or just like to pretend. As average workers’ incomes advance, Coach might benefit as much as consumer-related companies that lack the ritz factor.

But with the spectacular gains that many luxury stocks have racked up in this decade, Dorsey says the issue is simply one of valuation. For example, Coach shares, at $51.25 on Friday, are priced at 30 times analysts’ mean earnings per share estimate of $1.70 for the fiscal year that will end in June.

Shares of long-suffering Wal-Mart, by contrast, have a price-to-earnings ratio of 15 based on analysts’ mean profit estimate of $3.24 a share for this fiscal year and a stock price of $48.34 on Friday.

You would expect a smaller, faster-growing company like Coach to command a premium price relative to earnings.

Still, Dorsey asks, “How much more spending by upper-class consumers does that [valuation] presume?”

tom.petruno@latimes.com