Reviewed by Aug 27, 2020| Updated on
What is Pure Play?
What are you looking 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 and those that have a single line of goods or businesses. The latter is known as pure plays.
Breaking Down Pure Play
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 interest in the product - or digitally purchasing it - declines only marginally, those businesses will be adversely affected.
Examples of Pure Play
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 like 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.
Investing in Pure Plays
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.