Reviewed by Oct 05, 2020| Updated on
What would you look for when you're trying to invest your money in the stocks of various companies? You may be looking for companies that will provide you with a steady stream of dividend income. Or, you may want to put your cash into businesses that can endure financial pressures.
Along with these factors, you may want to look at certain kinds of stocks—of companies that have diversified activities or those that have a single line of goods or businesses. The latter is known as pure plays.
A pure-play is a term for investors for a publicly-traded firm that focuses its energies and resources on only one business line. As such, its stock performance is highly correlated with the performance of its particular industry or sector.
Many retailers in the electronics, e-commerce companies, or e-tailers are pure plays. All they do is sell one specific product type over the internet. Therefore, if the interest in digitally purchasing it declines only marginally, those businesses will be adversely affected.
Pure plays can also be big corporations. For instance, Dunkin' Brands Group (DNKN), which owns coffee shops at the Dunkin' Donuts, and Starbucks (SBUX) represent pretty pure coffee plays. An investor or a trader who wants to get in on this caffeinated commodity's rising prices should probably aim at them.
The J.M. Smucker Company (SJM), on the other hand, wouldn't be a pure-play because even though it owns big java brands, such as Folger's, it also owns, and maybe is primarily associated with, jams, jellies, and other food items. It is more of a play on food than a game on coffee.
The first reason is that it is much easier to analyse the pure-play companies. Because they are involved in only one type of business or product line, their profits and cash flows are much easier to follow and understand; it's just not that complicated. This, in effect, makes the business models extremely predictable.
These companies serve a niche market, so their revenues increase when they do well and become famous. This plays out in investors' financial rewards—their stock values, or an increase in dividends if they pay them out.