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.

BREAKING DOWN '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.

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