What is a Purple Chip Stock?
Purple Chip Stock is a term coined by portfolio manager John Schwinghamer in his 2012 book "Purple Chips: Winning in the Stock Market with the Very Best of the Blue Chip Stocks" to describe a stock that is “the royalty of blue chip stocks,” or the highest-quality and lowest-risk of these top-notch stocks.
Schwinghamer describes purple chip stocks as 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 earnings per share (EPS) 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.
- Purple chips are the highest quality of the blue chip stocks.
- Purple chips have seven years of EPS growth and market caps of greater than $1 billion.
- Other factors such as return on equity, return on assets, net profit margin, and price to earnings growth are also considered.
Understanding the Purple Chip Stock
In his book, and on PurpleChips.com, Schwinghamer describes his stock-picking technique, which seeks out 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.
On his website, Schwinghamer, who is based in Canada, states that as of March 2021, of 224 completed trades using his method, 180 were winners with a 12.97% average return, not including dividends.
Example of Trading a Purple Chip Stock
On PurpleChips.com, Schwinghamer outlines the stocks he views as purple chips. The top-20 list includes purple chip companies (available to members only) along with their current price. Next to this are two columns that provide an undervalued price and an overvalued price.
The basic concept is to buy these purple chips stocks when they move below the undervalued price, and then sell them when they move near or above the overvalued price. The method is applied to both US and Canadian stocks.
Based on the criteria presented by the particular purple chip stock, the position size in each stock will vary from quarter weight to full weight. Position are also divided into "core" and "satellite."