What is a pure play?

By Investopedia Staff AAA
A:

A pure play is a company that invests its resources in only one line of business. As such, this type of stock has a performance that correlates highly to the performance of the stock's particular industry. For example, many electronic retailers or "e-tailers" are pure plays. All they do is sell one particular type of product over the internet. Therefore, if internet buying declines even slightly, these companies are negatively affected.

The performance of a pure play may also be highly affected by the type of investing style that targets it. For example, if a pure play's line of business is favored by growth investing, the company will do well during a bull market, when growth stocks tend to outperform the market. Conversely, during bear markets, when a value investing strategy is historically more profitable, a pure play associated with growth investing will do poorly.

Pure plays can be contrasted with companies that have many diverse lines of business and diverse sources of revenue. For example, Tyco International is a large conglomerate involved in almost everything you can think of, from home security to plastics and adhesives. Because of this diversity within its product line, Tyco's stock performance, unlike that of a pure play, is not affected by one or two concentrated factors, but by many different variables.

Due to the nature of pure plays and their dependence on one sector of the economy, one product, or one investing strategy, they are often accompanied by higher risk. On the other hand, this higher risk brings the potential for higher rewards because when conditions are in their favor, pure play stocks can flourish.

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