A pure play is a company that focuses all of its efforts on a single business, product, or industry. For example, a company that specializes in manufacturing vacuum cleaners and doesn't make another type of product could be considered a pure play.
Advantages and disadvantages of pure play investments
There are some good reasons to invest in pure play stocks.
For one, pure plays are generally simpler to analyze than diversified businesses. The revenue and growth of pure play businesses are easier to interpret than those of businesses whose revenue comes from several different sources. If a business' income comes from a variety of products, then it may be subject to different profit margins and industry growth benchmarks, making it difficult to evaluate the health of the company as a whole.
Secondly, pure plays offer the potential for high rewards if things are going well. For example, Chipotle Mexican Grill focuses exclusively on the fast-casual dining industry, and thus it has benefited tremendously from a surge in that segment's popularity.
However, pure plays have their downside, too. By definition, a pure play business is not diversified whatsoever. So if its particular business goes through difficult times, then the company's revenue could drop sharply, as there are no other lines of business to offset each other's poor performance. Brick-and-mortar apparel retailers are a good example of this: Many companies that have focused solely on physical clothing stores are either bankrupt or struggling to profit. On the other hand, companies that sell clothing and a variety of other products (think Target) have fared better, as have retailers that have established a strong online presence.
Pure play examples
There are plenty of companies that are pure plays on specific businesses. For example, Tiffany & Co. is a pure play on luxury goods. Buffalo Wild Wings is a pure play on the restaurant business.
As a clear example of a company that is not a pure play, consider Berkshire Hathaway. This company's primary business is insurance, which it conducts through subsidiaries such as GEICO. However, Berkshire also owns dozens of other subsidiaries in industries from homebuilding to furniture stores to private jets, and it invests in a diverse portfolio of common stocks. Therefore Berkshire Hathaway is not a pure play on the insurance business.
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Matthew Frankel, who wrote this article, owns shares of Berkshire Hathaway (B shares). The Motley Fool owns shares of and recommends Berkshire Hathaway (B shares), Buffalo Wild Wings, and Chipotle Mexican Grill. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.