Investing in the ‘Royalty’ of Blue Chip Stocks

Purple chip stocks are considered to be the best of the blue chip stocks, as only 4% of publicly-traded companies qualify, according to veteran investor John Schwinghamer

SmallCapPower | September 24, 2019: On Day One of the 2019 Money Show Conference in Toronto, we got a chance to listen to veteran investor John Schwinghamer talk about why investors should own purple chip stocks. John Schwinghamer is the author of Purple Chips: Winning in the Stock Market with the Very Best of the Blue Chip Stocks and is a portfolio manager with ScotiaMcLeod.

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According to Mr. Schwinghamer, purple chip stocks are the ‘royalty’ of blue chip stocks, or the best of the best. There are three basic criteria used to identify a purple chip stock: 1) the company must have stable and predictable earnings; 2) seven years plus of consistent profitability; and 3) a market cap of at least $1.0B. Just by applying these three criteria, John says you eliminate 96% of all publicly-traded companies. John Schwinghamer says that if you are looking for low risk, low volatility companies, you should not expect a home run, and have no commodity exposure.

Why is increasing earnings growth important? With more earnings companies can pay more dividends and buyback shares. John also mentioned that during recessions purple chip stocks tend to fair better that others. During the Great Recession of 2008, purple chip stocks were down 17%, compared with the Dow Jones Industrial Average, which lost 42%. It took purple chips one year to recovery to the level they were before the Crisis, while it took the Dow Jones five years to recover.

One of John Schwinghamer’s top purple chip Canadian picks is Dollarama Inc. (TSX:DOL). He says that its EPS has been growing for the past seven years, and that if earnings keep an upward trajectory you can be pretty sure that the share price will keep appreciating as well. His other top Canadian picks include Alimentation Couche-Tard Inc. (TSX:ATD.B), Constellation Software Inc. (TSX:CSU), and Royal Bank of Canada (TSX:RY), which have similar earnings-growth profiles.

John’s top U.S. pick is pharmaceutical company Amgen (NASDAQ:AMGN). The Company faired well during the Financial Crisis, its stock pricing was falling but earnings were rising, and the stock price eventually caught up to the earnings growth. Also, FactSet (NYSE:FDS) is another top pick, as it has a great 20-year chart, pays a dividend, and its EPS has never had a single declining quarter. Other top U.S. picks include: Mastercard (NYSE:MA), AutoZone, Inc. (NYSE:AZO), Church and Dwight Co Inc. (NYSE:CHD), and Medtronic plc (NYSE:MDT).

Disclosure: Neither the author nor his family own shares in any of the companies mentioned above.

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