by Marc Bastow | September 24, 2013 12:01 pm
I’m all for buying “blue chip” stocks for the long-term. Hey, what long-term investor isn’t?
However, I recently heard of a higher chip being flashed across the table: “purple chips.” The term was coined by Jeff Schwinghammer, whose thoughts were highlighted by Jeff Macke. The thought: “A purple chip is the royalty of blue-chip stocks … because purple is the royal color.”
The qualifications for being a purple chip are basically a screen for stability and performance: smooth earnings profiles, including seven years of consecutive EPS growth, and market caps north of $1 billion. Not surprisingly, you’ll find Procter & Gamble (PG), McDonald’s (MCD) and IBM (IBM) on Macke’s list of what I’d call the “usual suspects.”
Of course, the thing about this kind of screen or any others is that you have to make room for the occasional blemish. Occasionally, you have a bad quarter — ask McDonald’s — but that doesn’t make these stocks (or others) any worse of an investment. Trying to shoehorn in a new subset of stocks already generally considered among the best of names … I get where Schwinghammer is going with it, but it just seems silly.
It’s fine to use Schwinghammer’s criteria to help you find good stocks, but don’t make it your end-all solution. There are several of solid companies out there that don’t necessarily fit his purple chip bill, but still have good financials and earnings prospects, size (by market cap) and even are kind on the dividend side. Three that come to mind include …
W.W. Grainger: Maintenance and repair supplier W.W. Grainger (GWW) saw net income drop 11% between 2009-10, disqualifying it as a purple chip, but has since rebounded with three consecutive years of earnings growth. Plus, through Q2, it’s on track to make it four years in a row. GWW has been a steady performer for years, and it’s topping the market with 30% gains year-to-date. Speaking of steady: GWW has increased its dividend for 42 consecutive years, putting it among InvestorPlace’s Dependable Dividend Stocks. Granted, it has a low (1.2%) dividend yield, but its payout ratio is a low 32%, so there’s room to grow that dividend.
ADP: Payroll processor and human resources management giant ADP (ADP) is another company that has had a few ups and downs, but is generally a rock-solid business. ADP now processes one in every six paychecks in the U.S. all the while managing human resource and tax planning functions for companies across a wide spectrum of sectors. ADP stubbed its toes between 2009-10 and had a minor hiccup between 2011-12, but is back on track again for 5% to 6% EPS growth in 2013. Also, ADP sports an “AAA” credit rating from Standard & Poor’s — one of only four companies with that gold-plated credit. Plus, ADP has increased its dividend 38 consecutive years, good for a modest 2.4% yield today.
Illinois Tool Works: Industrial products and equipment supplier Illinois Tool Works (ITW) saw earnings fall 7% between 2008-09, but that was a pretty rough period for most companies across the board. And since then, ITW has bounced back to crank out earnings gains in every fiscal year since. Product diversity helps keep ITW on an even path; from arc-welding equipment to plastic and metal components for transportation needs, ITW holds more than 20,000 patents, and is an innovation machine. It’s also a dividend machine, offering up 39 consecutive years of dividend increases. ITW currently yields 2.2%.
Marc Bastow is an Assistant Editor at InvestorPlace.com. As of this writing, he did not hold a position in any of the aforementioned securities.
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