you look at the formal robes of royal families, the colour purple often appears and John Schwinghamer has written a book called Purple Chips, John Wiley & Sons, 2012.

The author believes all stock prices go up and down, including the best ones – if you look at the past you will see a trading range for them, which means there is an opportunity to make money through concentrating on the purple chips or the best companies. To qualify as a purple chip the company must meet 3 criteria: 1) a minimum of 7 years of positive and growing EPS or earnings per share; 2) smooth and predictable growth in EPS; and 3) a minimum market capitalization of $ 1 billion.

The reasons for the 7 years the idea is to invest for the long term and the best companies outperform the competition in the long term. The 7 year helps to ensure companies that are making up their numbers are found out before the 7 years, and the 7 years tends to reflect business cycles which go both up and down.

The smooth and predictable earnings history is needed because earnings are the primary driver of stock prices. When earnings go up, stocks prices go up; when they go down, stock prices go down. Stocks typically trade as a multiple of their earnings ie 10 times earnings or 15 times earnings. Questions then can be made what multiple are similar stocks are trading at and the one that you are looking at – is higher or lower and why?

The reason for the $ 1 billion in capitalization (stock price x number of shares outstanding) is size matters. The ride may not be as thrilling as being in a speedboat but they produce steady and predictable earnings that yield a predicable price from which you can profit from,

The trick is buy, hold, sell, and buy again and stay within the purple chips. Purple chips are often companies that pay dividends for the companies are the same ones that have predictable cash flow and superior track records. As you wait for the share price to increase, you get paid to wait.

The criteria showed 250 companies on the US exchange meeting, adding the criteria of smoothness of the EPS line brings the number to 25. Had you own an equal weighting in 2008 the group was up 15% while the S&P 500 index was negative 14%. The top 25 companies are Hewlett Packard, EMC, McCormick, SJ Smucker, Flower Foods, Fresenius, Express Scripts, Ecolab, Church & Dwight, Teva, McDonald’s. Oracle, Medco Health Solutions, Davita, Mednax, AFLAC, IBM, DST Systems, Medtronic, Becton Dickinson, CR Bard, Johnson & Johnson, Abbott Labs, Wal-mart, Factset

Note a number of the above companies are in healthcare which is expect to get even bigger now the first group of baby boomers is retiring.

More in the next column.

There are more questions than answers, till the next time – to raising questions