Purple Chip Stock

AAA

DEFINITION of 'Purple Chip Stock'

A term coined by portfolio manager John Schwinghamer in his book "Purple Chips: Winning in the Stock Market with the Very Best of the Blue Chip Stocks" published on April 16, 2012 to describe a stock that is “the royalty of blue chip stocks,” or the highest-quality, lowest-risk of these top-notch stocks. Schwinghamer describes purple chip stocks as shares of a blue chip company that has grown slowly and steadily rather than suddenly and unpredictably. He directs investors to look for seven years of consecutive growth in the company’s earnings per share as an indicator that the company is creating long-term value and can continue to perform well even during economic downturns. A purple chip company also has a market capitalization of more than $1 billion.

INVESTOPEDIA EXPLAINS 'Purple Chip Stock'

In his book “Purple Chips,” Schwinghamer describes his stock-picking technique, which culls the “royalty” of the blue chips. He states that investors are more likely to succeed if they experience frequent, small gains and occasional losses rather than frequent, small losses and occasional large gains.

Schwinghamer says investors should look for businesses that consumers patronize, and companies that create products and services that consumers demand, even when the economy is underperforming. He advises purchasing purple chip stocks when irrational investor sentiment has depressed their values temporarily.

Other defining characteristics of a purple chip stock are a five-year return on equity, return on assets of more than 10% and a five-year average net profit margin that exceeds that of similar companies. He graphs a stock's EPS relative to its price as one component of determining a stock’s value. He also considers the stock's valuation trend and its PEG ratio. He recommends that investors place no more than 15% of their money in the same sector and no more than 5% in one stock (3% if the stock does not pay dividends, but purple chips typically pay dividends). Schwinghamer’s method doesn’t require in-depth analysis or a finance degree, but it does require an understanding of some basic stock investing concepts.

RELATED TERMS
  1. Blue-Chip Index

    A stock index that tracks the shares of the top-performing publicly ...
  2. Blue Chip Indicator

    A formal gauge or measure of the performance of a selected group ...
  3. Buy And Hold

    A passive investment strategy in which an investor buys stocks ...
  4. Blue Chip

    A nationally recognized, well-established and financially sound ...
  5. Value Investing

    The strategy of selecting stocks that trade for less than their ...
  6. Growth Investing

    A strategy whereby an investor seeks out stocks with what they ...
RELATED FAQS
  1. What is the average return on equity for a company in the retail sector?

    The retail sector includes automotive; building supply; distributors; general; grocery and food; online; and special lines ... Read Full Answer >>
  2. What is the average price-to-book ratio of companies in the retail sector?

    The retail sector includes seven types of retail companies: automotive; building supply; distributors; general; grocery and ... Read Full Answer >>
  3. Are companies with high Book Value Of Equity Per Share (BVPS) takeover targets?

    Companies with high book value of equity per share (BVPS) can be good takeover targets if those companies are public and ... Read Full Answer >>
  4. Why is the utilities sector popular among value investors?

    The utilities sector is popular among value investors due to the dividends paid by utility companies as well as the traditionally ... Read Full Answer >>
  5. What factors make the telecommunications sector good for value investing?

    The telecommunications sector is an attractive option for value investors because it is an integral part of the global economy. ... Read Full Answer >>
  6. What Book Value Of Equity Per Share (BVPS) ratio indicates a buy signal?

    Book value of equity per share (BVPS) is a ratio used in fundamental analysis to compare the amount of a company's shareholders' ... Read Full Answer >>
Related Articles
  1. Investing Basics

    The Ethics Of Investing

    The proper application of ethics to the world of investments is a highly subjective topic.
  2. Fundamental Analysis

    7 Controversial Investing Theories

    We take a closer look at the theories that attempt to explain and influence the market.
  3. Mutual Funds & ETFs

    The Truth Behind Tactical ETF Investing

    Are tactical ETFs reasonable and effective investment strategies or just plain speculative behavior?
  4. Investing Basics

    Does Active Value Investing Pay Off?

    Learn about a recently published paper that explores why active value investors underperform.
  5. Fundamental Analysis

    Cash Flow From Investing

    Cash flow analysis is a critical process for both companies and investors. Find out what you need to know about it.
  6. Active Trading

    Value Investing

    Learn everything there is to know about value investing.
  7. Trading Strategies

    How To Avoid Emotional Investing

    Most investors buy high and sell low, but you can avoid this trap by using some simple strategies.
  8. Home & Auto

    Flipping Houses: Is It Better Than Buy and Hold?

    Real estate investors can flip a property or use it for cash flow. Find out which will work in your neck of the woods.
  9. Active Trading

    Value Investing + Relative Strength = Higher Returns

    Buying value stocks that are moving higher helps investors steer clear of value traps.
  10. Fundamental Analysis

    Value Investing Using The Enterprise Multiple

    This simple measure can help investors determine whether a stock is a good deal.

You May Also Like

Hot Definitions
  1. Topless Meeting

    A meeting in which participants are not allowed to use laptops. A topless meeting organizer can also ban the use of smartphones, ...
  2. Hedging Transaction

    A type of transaction that limits investment risk with the use of derivatives, such as options and futures contracts. Hedging ...
  3. Bogey

    A buzzword that refers to a benchmark used to evaluate a fund's performance. The benchmark is an index that reflects the ...
  4. Xetra

    An all-electronic trading system based in Frankfurt, Germany. Launched in 1997 and operated by the Deutsche Börse, the Xetra ...
  5. Nuncupative Will

    A verbal will that must have two witnesses and can only deal with the distribution of personal property. A nuncupative will ...
  6. OsMA

    An abbreviation for Oscillator - Moving Average. OsMA is used in technical analysis to represent the variance between an ...
Trading Center
×

You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!