DEFINITION of 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, 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 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 and website “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.
On his website, Schwinghamer, who is based in Canada, stated as of May 2018 that of 142 completed trades using his method, 119 were winners with a 12.1% average return, not including dividends. He offers a fee 30-day trial subscription to his website, where "You’ll have access to my videos that review the principles and methods essentials regarding Purple Chips as well as exclusive, up-to-date research of U.S. and Canadian stocks."