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. Large Cap - Big Cap

    A term used by the investment community to refer to companies ...
  4. Blue Chip

    A nationally recognized, well-established and financially sound ...
  5. Blue-Chip Stock

    Stock of a large, well-established and financially sound company ...
  6. Mega Cap

    The biggest companies in the investment universe, as measured ...
RELATED FAQS
  1. What is Apple's current mission statement and how does it differ from Steve Job's ...

    Apple's current mission statement is "Apple designs Macs, the best personal computers in the world, along with OS X, iLife, ... Read Full Answer >>
  2. Why should I be looking at small cap stocks as a potential investment?

    Investors should look at small-capitalization stocks for upside growth potential and portfolio diversification. Despite these ... Read Full Answer >>
  3. Other than my savings account, what other types of holdings compound my interest?

    Investors and savers can use the power of compounding interest to accumulate wealth over time. Unlike simple interest that ... Read Full Answer >>
  4. Is the banking sector a good choice for value investing?

    The banking sector is a good choice for value investing. Value investors look for stocks in which the market price does not ... Read Full Answer >>
  5. Which financial statements are most important when performing ratio analysis?

    Financial ratio analysis is an important aspect of fundamental analysis for any party engaged in value investing. Financial ... Read Full Answer >>
  6. Where can I find a good compound interest calculator free on the Internet?

    A number of free online compound interest calculators are offered online. One of the best is available through Pine Grove ... 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. Fiduciary

    1. A person legally appointed and authorized to hold assets in trust for another person. The fiduciary manages the assets ...
  2. Expected Return

    The amount one would anticipate receiving on an investment that has various known or expected rates of return. For example, ...
  3. Carrying Value

    An accounting measure of value, where the value of an asset or a company is based on the figures in the company's balance ...
  4. Capital Account

    A national account that shows the net change in asset ownership for a nation. The capital account is the net result of public ...
  5. Brand Equity

    The value premium that a company realizes from a product with a recognizable name as compared to its generic equivalent. ...
Trading Center