Unlike conglomerates, a "pure play" is a company that has a single business focus. When investors are drawn to a particular industry, they may look for a company that's a pure play, so that their invested dollars won't be spread out over other, less desirable businesses.
If your research suggests that the light bulb industry is one of the most attractive and profitable ones around and you want to invest in it, you might invest in General Electric, which makes everything from light bulbs to airplane engines. Or you might try to find a pure-play light bulb company. The hypothetical Bright Idea Light Bulb Co. (ticker: UREKA) might fit the bill. Money invested in GE would cover many different operations with varying profitability characteristics, while funds in UREKA would be focused solely on light bulbs.
Coca-Cola (NYSE:KO) is a beverage pure play, unlike PepsiCo (NYSE:PEP), which has a giant snack operation in Frito-Lay. Reynolds American (NYSE:RAI) is a tobacco pure play, while Altria (NYSE:MO) owns all or part of Philip Morris, Kraft Foods, and beer maker SABMiller.
A Fool reader responds
After we last ran a version of this article, Fool community member A Brunelle made some good points related to it, on our Drip Investing -- The Basics discussion board. Here's his perspective:
"[You don't] make the counterpoint that other investors may be attracted to the concept of a well-run diversified company over a company that is susceptible to hits taken to a specific product/segment. From my own experience, I seem to be drawn toward the latter types of companies (I own Johnson &Johnson (NYSE:JNJ), Pfizer (NYSE:PFE), and Intel (NASDAQ:INTC) -- the last is certainly more than "just a CPU" company, although it is primarily in the semiconductor arena; and I'm currently looking at adding either PepsiCo or General Electric -- both of which are rather "impure.") As I only Drip into a small number of companies (I'm probably going to max out at five, and wouldn't be surprised if I decided on both PEP & GE to fill it out!), it makes some sense (to me at least) to select companies that have some diversity built into them."
"Drips" are "direct investment plans" or "dividend reinvestment plans," which permit you to invest small amounts of money directly in companies, bypassing brokers. We offer much more info here.
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Coca-Cola and Pfizer are Motley Fool Inside Value recommendations.
