The concept of a pure play refers to what a company does only. Some prefer pure plays because they are easier to analyze and allow investors to gain maximum exposure to specific sectors of the market.
In contrast, a pure play offers a wide range of products and services across several industries, compared to multi-divisional corporations or conglomerates.
Investors interested in U.S. banking stocks, for example, may prefer holding shares of Bank of America (BAC) rather than Berkshire Hathaway (BRK.B) because the former company operates in a number of other industries and sectors as well.
KEY LESSONS – PURE PLAY
Investments in pure plays refer to companies which are focused on a single industry or niche.
Pure plays can be attractive to investors because they are easy to analyze and offer exposure to a specialized sector.
In today’s corporate world, they often involve companies in over one product line or market segment, making identifying pure plays difficult.
An Understanding of Pure Play
Some types of active investors look for pure play companies because they want to make specific bets on particular products or industry segments. Investing in a company with diversified business lines forces these investors to take unnecessary risks in industries they are not interested in.
Pure plays offer analysts the opportunity to get more accurate information for the comparability or peer analysis of companies. Besides providing information for investment analysis, I also used these reports as a basis for relative valuations.
In relative valuations, metrics such as price-to-book (P/B), price-to-earning (P/E), price-to-sales (P/S), and price-to-cash flow (P/CF) ratios are used. Investment analysts can use these values to calculate the relative value of the company and determine if it is undervalued or overvalued. As they can be directly compared, pure-play companies are useful inputs to these analyses. Since conglomerates represent multiple industry sectors, their results are not easily comparable.
Important -In reality, I used the term pure play as a rough approximation, since corporations today are almost always exposed to markets across multiple industries. Publicly traded companies are susceptible to this phenomenon.
Pure Play Example in the Real World
In the banking industry in the United States, a trader conducts an analysis. They specifically sought a comparison based on the dollar per share and price to book ratio out for various U.S. banking stocks. Below is a list of stocks to be analyzed:
A PB of 1.28 and PE of 12.98 for BB&T Corporation
PB is 1.06 and PE is 10.58 for KeyCorp
With SunTrust Banks, the PE was 11.88 and the PB was 1.16
Citizens Financial Group: PE of 9.59 and PB of 0.75
These four business models, which have regional banking as a core focus of their business models, are relatively similar to one another; as every business is complex and unique, this is expected. We can thus see them as “pure plays” in the banking sector.
Berkshire Hathaway’s significant role in the financial sector, however, made this trader tempted to include it in the list. Because of Berkshire’s many non-banking activities, the direct comparison with pure-play banking was not possible.
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