Wednesday, February 4, 2015

Blue Chips or Purple Chips?

In the world of investing blue-chip stocks are defined as a stock of a  large, well-established and financially sound company that has operated for many years. A blue-chip stock is generally the market leader and is often a household name. While dividend payments are not absolutely necessary for a stock to be considered a blue-chip, most blue-chips have a record of paying stable or rising dividends for years. The term is believed to have been derived from poker, where blue chips are the most expensive chips.

In John Schwinghamer's Purple Chips, he further refines his investment strategy to purple-chips, stocks that are of the highest quality blue-chips. What are the criteria for a blue-chip stock to pass as a purple-chip stock? Here are the three criteria listed in Purple Chips:
  1. A minimum 7 years of positive earning per share (EPS) growth.
  2. Smooth and predictable growth in EPS.
  3. A minimum market capitalization of $1 billion.
In addition to these three criteria John lists three Financial Health Ratios that helps separate the purple-chips from the blue-chips:
  1. 5-year return on equity is greater than 10%.
  2. 5-year return on assets is greater than 10%.
  3. 5-year net profit margin (average) is greater than the industry average.
Here's a short video introduction to the book: