What Is a Pure Play?
A pure play is a company that focuses on a single type of product or service. The opposite of a pure play is a conglomerate, which offers many products and services across various industries.
Some investors prefer investing in pure plays because they are easier to analyze and give maximum exposure to a particular market segment.
For instance, an investor who wants exposure to U.S. banking stocks might prefer buying Bank of America as compared to Berkshire Hathaway, because the latter is involved not only in banking but also in many other industries.
- A pure play is a company that is focused on a specific industry niche.
- Pure plays are the opposite of conglomerates, which are involved
- Investors like pure plays for their ease of analysis and the exposure they offer to particular sectors.
Understanding Pure Plays
Pure play companies are popular with certain types of active investors who want to make specific bets on particular products or industry segments. For these investors, buying a company with several diversified business lines forces them to take unnecessary risks in industries in which they do not want to invest.
For analysts, pure plays represent an opportunity to obtain more accurate data for a comparable company analysis or peer analysis. These reports are a vital source of information for investment analysis and the basis for relative valuations.
Relative valuations make use of metrics such as the price-to-book (P/B) ratio, the price-to-earnings (P/E) ratio, the price-to-sales (P/S) ratio, and the price-to-cash flow (P/CF) ratio. Each of these values can help the investment analyst calculate the relative value of a company and to evaluate whether the company is overvalued or undervalued. Pure play companies are helpful inputs into these analyses because they are much more directly comparable with each-other.