What is a Purple Chip?

[vc_row][vc_column][vc_video link="https://www.youtube.com/watch?v=ft5Kh4uyaeI"][vc_column_text] A Purple Chip is a blue chip stock of the highest caliber. There are three main criteria for a company to qualify as a purple chip: 1) A minimum seven years of positive and growing EPS 2) Smooth and predictable growth in EPS 3) A minimum market capitalization of $1.0 billion (1) Minimum Seven Years of Positive and Growing EPS The first criteria is that a Purple Chip stock must have exhibited growth in EPS for a minimum of seven years. To ensure that companies report their earnings in a consistent and comparable manner, Generally Accepted Accounting Principles (GAAP) require every public company to report its earnings in a consistent manner and on a quarterly basis (every three months). Over the past decade, there has been a trend among investors to focus on short term considerations at the expense of long-term ones. This trend has been fueled by faster business cycles and the fact that companies have to be quick and nimble to succeed in this ever changing environment. While the climate has changed for many industries and the flow of information and goods is much faster than it used to be, Purple Chips focuses on the historical earnings record. The Purple Chip model is based on the belief that a long-term track record speaks volumes about how a company deals with the challenges of everyday business. The very best companies are those that consistently outperform competitors over the long term, and also exhibit certain hallmarks in the smoothness and predictability of their EPS over an extended period of time. Seven years of historical earnings is long-term in this day and age and in most cases the management of a company cannot obscure or manipulate the company’s true performance over such a long time period. (2) Smooth and Predictable Growth in EPS Earnings are the primary driver of stock prices. When earnings rise, stock prices usually follow. When they drop, so do stock prices. Because stock prices are driven by earnings, a company’s earnings history provides key information in determining when a stock is good value, and when it isn’t. Smooth and predictable growth in EPS is the hallmark of a Purple Chip stock. This is an important concept to grasp: the earnings tell you where a stock’s price is going in the future, which helps you gauge the stock’s current value. Conversely, if earnings begin to deteriorate, the stock price will generally follow the downward shift in earnings. (3) Minimum Market Capitalization of $1 Billion While bailouts are in the trillions, a Purple Chip stock is one that has achieved a market capitalization of $1 billion or more. For example, if ABC Company has 100 million shares outstanding and its shares trade at $10 per share then:

ABC Market Capitalization = 100,000,000 shares × $10 per share Market Capitalization = $1B

Steady and predictable earnings are the hallmark of the Purple Chip model. Their predictability is what creates backdrop for the investment opportunity.[/vc_column_text][/vc_column][/vc_row]