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Navigating Purple Chip Stocks: Definition, Strategy, and Investment Insights

Last updated 03/15/2024 by

Abi Bus

Edited by

Fact checked by

Unlock the secrets of purple chip stocks, the pinnacle of blue chip investments. Delve into the definition, characteristics, investment strategy, and expert insights surrounding these elite stocks.

Understanding purple chip stocks

Purple chip stocks, introduced by portfolio manager John Schwinghamer, represent the highest echelon of blue chip stocks. These stocks epitomize stability, quality, and consistent growth, making them highly sought after by investors seeking reliable returns. The concept of purple chip stocks builds upon the foundation of blue chip stocks, emphasizing even greater rigor in financial performance and market standing.

Evolution from blue to purple

While blue chip stocks are already esteemed for their stability and long-standing presence in the market, purple chip stocks take this a step further. They are characterized not only by consistent growth but also by a meticulous track record of seven consecutive years of earnings per share (EPS) growth. This sustained growth signifies a company’s ability to weather economic fluctuations and maintain profitability over the long term.

Criteria for purple chip status

To qualify as a purple chip stock, a company must meet stringent criteria beyond earnings growth. It typically boasts a market capitalization exceeding $1 billion, indicating its substantial size and market dominance. Additionally, factors such as return on equity, return on assets, and net profit margin are scrutinized to ensure the company’s financial health and profitability.

Schwinghamer’s approach

John Schwinghamer’s approach to purple chip investing is grounded in fundamental analysis and disciplined decision-making. He emphasizes the importance of investing in businesses with enduring consumer demand, regardless of prevailing economic conditions. By focusing on companies with products and services that consumers consistently rely on, Schwinghamer aims to mitigate risk and capitalize on long-term growth opportunities.

Strategic investment timing

Schwinghamer advises investors to seize buying opportunities when irrational investor sentiment temporarily depresses the value of purple chip stocks. By purchasing these stocks at discounted prices, investors position themselves for potential upside as market sentiment rebounds. This contrarian approach aligns with Schwinghamer’s philosophy of capitalizing on market inefficiencies and mispricings.

Portfolio diversification

Diversification is a key tenet of Schwinghamer’s investment strategy. He recommends spreading investments across multiple sectors to minimize risk and enhance overall portfolio stability. Additionally, he advocates for prudent position sizing, with no more than 15% of one’s portfolio allocated to a single sector and no more than 5% to an individual stock. This diversification strategy helps safeguard against sector-specific downturns and company-specific risks.

Characteristics of purple chip stocks

Purple chip stocks exhibit a constellation of characteristics that set them apart as elite investment opportunities. Beyond their financial metrics, these stocks embody resilience, adaptability, and a track record of consistent performance. Key attributes of purple chip stocks include:

Exceptional quality and stability

Purple chip stocks are renowned for their exceptional quality and stability, making them coveted additions to investment portfolios. These companies have demonstrated resilience in the face of economic headwinds and have maintained profitability even during challenging times.

Consistent growth over time

One of the hallmarks of purple chip stocks is their consistent growth trajectory. These companies have not only achieved sustained earnings growth but have also outperformed industry peers over the long term. This track record of consistent growth instills confidence in investors and underscores the company’s ability to generate value over time.

Long-term value creation

Purple chip stocks are not merely vehicles for short-term gains; they represent opportunities for long-term value creation. By investing in companies with enduring competitive advantages and robust business models, investors can participate in wealth accumulation over the long term.

Schwinghamer’s track record

John Schwinghamer’s investment methodology has yielded impressive results, underscoring the effectiveness of his purple chip investing approach. As of March 2021, Schwinghamer reported a high proportion of winning trades, with an average return of 12.97%, excluding dividends. This track record reflects the robustness of his investment strategy and the potential for investors to achieve consistent returns over time.

Disciplined investing

Schwinghamer’s success is rooted in disciplined investing principles and a steadfast commitment to his investment strategy. By adhering to a rigorous process and maintaining a long-term perspective, Schwinghamer has navigated volatile market conditions and capitalized on investment opportunities.

Strategic portfolio management

Effective portfolio management is a cornerstone of Schwinghamer’s investment approach. He emphasizes the importance of strategic asset allocation, diversification, and risk management in constructing resilient portfolios. By carefully balancing risk and reward, Schwinghamer seeks to optimize returns while mitigating downside risk.

Example of trading a purple chip stock

To illustrate his investment strategy in action, Schwinghamer provides practical examples of trading purple chip stocks on He curates a list of purple chip companies along with their current prices, undervalued prices, and overvalued prices. Investors can leverage this information to identify buying opportunities when purple chip stocks trade below their intrinsic value and capitalize on potential upside as they approach or exceed their fair value.

Position sizing and allocation

Schwinghamer employs a nuanced approach to position sizing and allocation, tailoring his investment decisions to specific criteria and market conditions. Position sizes may vary from quarter weight to full weight, depending on the attractiveness of the investment opportunity and the investor’s risk tolerance. Additionally, positions are categorized as “core” or “satellite,” reflecting their strategic importance within the portfolio.
Here is a list of the benefits and the drawbacks to consider.
  • Exceptional quality and stability
  • Consistent growth over time
  • Opportunity for long-term value creation
  • Resilience during economic downturns
  • Portfolio diversification benefits
  • Requires disciplined investing approach
  • Market fluctuations may impact returns
  • Not immune to economic downturns
  • Relatively limited pool of purple chip stocks
  • Higher valuation may lead to lower dividend yields

Frequently asked questions

What distinguishes purple chip stocks from blue chip stocks?

Purple chip stocks represent the highest tier of blue chip stocks, characterized by exceptional quality, stability, and consistent growth over time. They typically exhibit seven consecutive years of earnings per share growth and have a market capitalization exceeding $1 billion.

How does Schwinghamer recommend investors approach purple chip stocks?

Schwinghamer advises investors to focus on businesses with sustained growth and consumer demand, even in challenging economic conditions. He suggests purchasing purple chip stocks when their values are temporarily depressed due to irrational investor sentiment.

What are some key metrics Schwinghamer considers in evaluating purple chip stocks?

Schwinghamer evaluates purple chip stocks based on factors such as return on equity, return on assets, net profit margin, and price-to-earnings growth ratio. He also examines EPS relative to price and recommends diversifying investments across sectors to mitigate risk.

How can investors identify potential purple chip stocks?

Identifying potential purple chip stocks requires thorough research and analysis of company fundamentals. Investors should look for companies with a strong track record of earnings growth, robust financial metrics, and a competitive advantage in their industry. Additionally, assessing market trends, consumer demand, and industry dynamics can help identify companies poised for long-term success.

Are purple chip stocks suitable for all investors?

While purple chip stocks offer potential for long-term growth and stability, they may not be suitable for all investors. These stocks typically require a long-term investment horizon and may be less liquid than other investments. Additionally, purple chip stocks may be subject to market fluctuations and economic downturns, making them unsuitable for investors with a low risk tolerance or short-term investment objectives.

How can investors mitigate risk when investing in purple chip stocks?

Investors can mitigate risk when investing in purple chip stocks by diversifying their portfolio across different sectors and asset classes. Additionally, maintaining a disciplined investment approach, conducting thorough research, and monitoring company performance can help investors identify potential risks and take appropriate action to mitigate them. Regular portfolio review and rebalancing can also help ensure that investments align with changing market conditions and investment goals.

Key takeaways

  • Purple chip stocks represent the pinnacle of blue chip investments, characterized by exceptional quality, stability, and consistent growth.
  • Criteria for purple chip status include seven consecutive years of earnings per share growth and a market capitalization exceeding $1 billion.
  • Investors can benefit from John Schwinghamer’s disciplined approach to purple chip investing, focusing on businesses with enduring consumer demand and purchasing opportunities during market downturns.
  • Key metrics for evaluating purple chip stocks include return on equity, return on assets, net profit margin, and price-to-earnings growth ratio.
  • Diversification, strategic portfolio management, and disciplined investing are essential for navigating the elite terrain of purple chip stocks.

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