Everyone knows investing in blue chips for the long haul is the way to make money in stocks. The problem is, finding these blue chips isn't as easy as it sounds. Stock valuation is subjective at its very core. The best an investor can hope to do is cut through the noise with some guiding metrics to help lead them to relative safety and potential returns.
John Schwinghamer's book, "Purple Chips" provides a decent way to help newcomers start the process of building a portfolio while learning valuable lessons about long-term shareholder value creation. In this edition of Investing 101, Schwinghamer walks through three steps for finding what he calls "purple chip" stocks. "A purple chip is the royalty of blue-chips stocks," Schwinghamer explains, "That's why we call them purple, because purple is the royal color."
Schwinghamer's three steps for discovering stock royalty are:
1) Smooth Earnings
The sign of a good stable company is steady growth, not explosive moves from quarter to quarter. Schwinghamer suggests looking at a few year's worth of earnings statements to find companies that have been built step by step, not in explosive leaps.
2) 7 Years of Consecutive EPS Growth
Purple Chip companies are able to ride out the ebbs and flows of economic cycles. Some companies are tailored to economic booms when high-end consumers scoop up big ticket items. Those can be just fine, but for non-traders Schwinghamer advises holding companies like McDonalds (MCD) where customers come year after year no matter what the economy is doing.
3) Market Capitalization Above $1 Billion
Leave the speculative plays for the gun slinging traders. Purple chips are regal, large, stable names like Proctor & Gamble (PG) that have grown into giants one year at a time.
The final tip deals with when to buy these best of the best. Schwinghamer says this is where a steady investor can take advantage of Wall Street's manic-depressive nature. His example is IBM, a company that has fallen out of favor with investors because it came in line compared to expectations. If you back up and look at the fundamentals IBM is the same company it always has been. Steady. Predictable and stable.
The only difference is the stock price. Schwinghamer says that's a good indication to start buying.
There isn't any perfect stock picking system but for newcomers to the market the "purple chip" method could be a great start to building a regal portfolio.