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Purple Chips: Winning in the Stock Market with the Very Best of the Blue Chip Stocks


Praise for Purple Chips

"In his book Purple Chips, John Schwinghamer makes a compelling case for the use of a disciplined, non-emotional approach to buying the best blue chip stocks. Investors of all stripes can benefit from a clear understanding of Schwinghamer's rule-based approach to investing."
--James P. O'Shaughnessy, author of What Works on Wall Street

"John Schwinghamer's highly readable book, Purple Chips, is a must for investors who want to improve their odds of investment success without wasting an inordinate amount of time trying to decipher the volume of investment 'noise.'"
--J. Anthony Boeckh, founder of the Bank Credit Analyst and author of The Great Reflation

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John Schwinghamer is a portfolio manager with a major bank in Montreal. He started his career in 1984 as floor trader at the Montreal Exchange and then became a stock broker and an expert in derivatives. John has also held management and partnership positions in several investment firms, and he currently manages the portfolios of a select group of clients. He has a B.Comm. in finance from Concordia University, as well as extensive securities industry accreditation. He is a lead judge for the International Case Competition at the John Molson School of Business at his alma mater. He has also been an expert witness in derivatives court cases. John lives in Montreal with his artist wife and has three children.

Acknowledgments xi

Introduction 1

My Background 3

Chapter 1: The Psychology of Investing 7

Singles and Doubles Are Better 7

Tune Out the Noise 10

EPS Explained 11

Chapter 2: Purple Chips versus Blue Chips 17

Finding the Purple Chips 18

Minimum Seven Years of Positive and Growing EPS 18

Smooth and Predictable Growth in EPS 19

Minimum Market Capitalization of $1 Billion 23

Purple Chips versus Common Blue Chips 24

Dilution Is a Value Killer 28

Dividends, or Getting Paid While You Wait 31

Purple Chips Make Money for Investors 31

Keeping It Simple: Th e Purple Chips Model versus Ratio Analysis 35

Con Edison versus Entergy 36

Wendy's versus McDonald’s 37

General Mills versus Kraft Foods 39

Google versus Yahoo! 41

Chapter 3: Understanding and Seeing Valuation 43

Th e Normal Curve: An Odds-Based Approach 43

Th e Shift ing EPS Line: A Quick Gauge of Value 45

Valuation Reset 49

Chapter 4: What Else You Need to Know 55

Earnings Trend 55

Value Traps 59

Valuation Trend 62

Th e P/E Ratio and Growth 69

How to Build a Portfolio of Purple Chips 71

Diversification 71

Position Size 72

Stop Loss Orders 73

No More Anchoring 74

Market Crashes 76

Do It Yourself 76

Chapter 5: When to Buy and Sell 79

Step 1: Draw the EPS Line 79

Step 2: Set the Buy and Sell Targets 82

Step 3: Adjust the Buy and Sell Targets 83

Buying Checklist 84

Selling Checklist 84

Chapter 6: Practice Case Studies 91

Case Study: Abbott Labs 93

Summary 106

Case Study: AutoZone 108

Summary 117

Case Study: Johnson & Johnson 118

Summary 127

Case Study: General Dynamics 129

Summary 136

Chapter 7: Purple Chips Summarized 137

Endnotes 141

Index 143

About the Author 149