Register For Our Mailing List

Register to receive our free weekly newsletter including editorials.

Home / 416

Best-in-class, ‘pure-play’ companies give clearer focus

Growth stocks have driven global equity markets higher over the past few years, but greater volatility in early 2021 may suggest that growth investors face a more challenging environment ahead. Successful growth investing will require greater selectivity to deliver attractive risk adjusted returns over the market cycle.

Competitive advantages and long-term growth trends

A deep understanding of what drives a company’s business and its markets is crucial to long-term success as a growth investor. We look for high-quality growth companies that have both the technological and operational prowess to build lasting competitive advantages. The businesses should benefit from long-term secular growth trends such as e-commerce adoption, vehicle electrification, cloud computing, and financial technology.

Businesses in such growing markets tend to be dynamic, always adapting to the needs of their customers and innovating to bring new technologies and services to market. We have found that investing in either best-in-class ‘pure-play’ companies, or those that operate in a small number of complementary businesses, is one way to stay ahead of changes in the business and the broader industry.

Unlike conglomerates, these focused companies offer growth investors the following three significant advantages:

  1. Deeper analysis of dynamic, fast-growing underlying markets
  2. Focused capital allocation
  3. A clear understanding of company-level economic exposures that can help with portfolio risk management.

Three examples of these insights

1. Deeper industry analysis: Intuitive Surgical vs Medtronic

The trend towards robotic-assisted minimally-invasive surgery is one place where a pure-play company can provide investors a deeper understanding of market dynamics than a more sprawling enterprise. We expect the penetration of robotic surgeries will increase over time, with worldwide procedures to grow from 2% to ~15% of surgeries over the next decade to ~US$18 billion (sourced from Goldman Sachs, Company Data).

Source: Intuitive Surgical

Intuitive Surgical Inc. is a US-based company that pioneered the robotic systems used in minimally invasive surgical procedures. Its da Vinci surgical system strives to make surgery more effective and less invasive, while also improving patients’ recovery times. The company currently has about 90% of an ever-expanding market as more types of surgeries are approved to be performed with the system.

Given its dominant position, Intuitive Surgical can provide investors with a better understanding of the trends in surgical systems than many of its competitors, such as Medtronic PLC.

Medtronic is a medical device conglomerate. Their robot-assisted surgical system remains under development and the division in which this product is being developed also includes several other surgical tools. Given the diversity of its product portfolio, analysing Medtronic may not give investors a clear picture of the trends at play in the specialised robot-assisted surgical market.

Additionally, within Medtronic, it can be difficult to assess which products and systems are being prioritised with research spending, and even then, this may change significantly over time. At Intuitive Surgical, by contrast, all its research and development efforts go into improving and expanding the capabilities of the da Vinci system which can further widen its lead over competitors.

In a growing, highly technical field such as robotic assisted surgery, changes in manufacturing, intellectual property, and the regulatory landscape can make large differences in relative market-share and future profitability potential.

To accurately analyze the competitive position of our portfolio with respect to this attractive market, we value Intuitive Surgical’ s direct exposure and market-leading position.

2. Focused capital allocation: Zebra Technologies vs Honeywell

Capital allocation is also often more efficient and better understood in pure-play companies than in conglomerates. For example, Zebra Technologies Corp. which makes barcode printers and scanners to help companies manage their inventories and assets, can more efficiently and effectively allocate capital than its largest competitor Honeywell International Inc.

Honeywell is a conglomerate, with business lines that span aerospace, building technologies, performance materials, and safety and productivity solutions. While Honeywell competes in the barcode scanner space, the division makes up just 5% of total revenue. It is inevitable that a company with such diverse operations, politics and persuasion may lead management to stray from the most efficient capital allocation strategy and potentially underinvest in attractive growth opportunities.

Source: Franklin Templeton, Honeywell Company Filings, 2020

Zebra’s management, by contrast, is focused on its one business, allowing it to be more effective, strategic, and proactive in real-time, by our analysis. A real-world consequence of this advantage was Zebra’s introduction of a mobile device based on the Android operating system, which has now become the industry standard. Competitors like Honeywell have struggled to get customers to switch to their later entries.

Source: Company reports.

A management team concentrating on one business gives us greater confidence in Zebra’s ability to remain nimble to take advantage of new market opportunities that arise in its dynamic industry.

3. Improved risk management: Aptiv PLC vs Infineon

Best-in-class companies with focused business models allow us to better understand risk at the portfolio level, particularly given our focus on building a concentrated growth portfolio that is still highly diversified.

In a 40-stock portfolio, for instance, understanding where potential investments may share a source of revenue or have similar expenses is critical in ensuring the portfolio is diversified. Since growth businesses often change over time, being able to keep ahead of these changes can help avoid instances where companies that once had little overlap begin to see greater exposure to a common market.

For instance, on the surface, Germany-based semiconductor manufacturer Infineon Technologies AG might not appear to have much in common with global auto parts manufacturer Aptiv PLC. But as cars and auto components have become more sophisticated and as the number of chips powering these systems have increased, Infineon’s business increasingly overlapped with Aptiv, given their exposure to auto production.

Two Sectors, One End-Market Exposure

Our experience has been that changes such as this can be more evident in companies that operate a single business or set of highly complementary businesses. 

Concentrating on the long term

The universe of growth stocks is large and diverse and finding opportunities that can outperform across a market cycle is challenging. Our experience as growth managers has reinforced our view that a focus on pure-play companies can help to build a concentrated, yet still highly diversified portfolio of best-in-class growth stocks. Often this can lead us down the market cap spectrum toward lesser-known names, however we also believe that there are plenty of large cap names which operate highly focused businesses, capable of generating attractive returns over the long term.

Though the world has become more uncertain in the past year, high-quality companies tied to long-term secular growth trends should produce compelling shareholder value, regardless of the macroeconomic environment. 

 

Francyne Mu is a Portfolio Manager of the Franklin Global Growth Fund. Franklin Templeton is a sponsor of Firstlinks. This article contains general information only and should not be considered a recommendation to purchase or sell any particular security. It does not consider the circumstances of any individual.

For more articles and papers from Franklin Templeton and specialist investment managers, please click here.

 

RELATED ARTICLES

Why stock prices are a distraction

We have many world best practice companies

Changing landscape of US large and mid caps

banner

Most viewed in recent weeks

Are LICs licked?

LICs are continuing to struggle with large discounts and frustrated investors are wondering whether it’s worth holding onto them. This explains why the next 6-12 months will be make or break for many LICs.

Retirement income expectations hit new highs

Younger Australians think they’ll need $100k a year in retirement - nearly double what current retirees spend. Expectations are rising fast, but are they realistic or just another case of lifestyle inflation?

Welcome to Firstlinks Edition 627 with weekend update

This week, I got the news that my mother has dementia. It came shortly after my father received the same diagnosis. This is a meditation on getting old and my regrets in not getting my parents’ affairs in order sooner.

  • 4 September 2025

5 charts every retiree must see…

Retirement can be daunting for Australians facing financial uncertainty. Understand your goals, longevity challenges, inflation impacts, market risks, and components of retirement income with these crucial charts.

Why super returns may be heading lower

Five mega trends point to risks of a more inflation prone and lower growth environment. This, along with rich market valuations, should constrain medium term superannuation returns to around 5% per annum.

Super crosses the retirement Rubicon

Australia's superannuation system faces a 'Rubicon' moment, a turning point where the focus is shifting from accumulation phase to retirement readiness, but unfortunately, many funds are not rising to the challenge.

Latest Updates

Investment strategies

Why I dislike dividend stocks

If you need income then buying dividend stocks makes perfect sense. But if you don’t then it makes little sense because it’s likely to limit building real wealth. Here’s what you should do instead.

Superannuation

Meg on SMSFs: Indexation of Division 296 tax isn't enough

Labor is reviewing the $3 million super tax's most contentious aspects: lack of indexation and the tax on unrealised gains. Those fighting for change shouldn’t just settle for indexation of the threshold.

Shares

Will ASX dividends rise over the next 12 months?

Market forecasts for ASX dividend yields are at a 30-year low amid fears about the economy and the capacity for banks and resource companies to pay higher dividends. This pessimism seems overdone.

Shares

Expensive market valuations may make sense

World share markets seem toppy at first glance, though digging deeper reveals important nuances. While the top 2% of stocks are pricey, they're also growing faster, and the remaining 98% are inexpensive versus history.

Fixed interest

The end of the strong US dollar cycle

The US dollar’s overvaluation, weaker fundamentals, and crowded positioning point to further downside. Diversifying into non-US equities and emerging market debt may offer opportunities for global investors.

Investment strategies

Today’s case for floating rate notes

Market volatility and uncertainty in 2025 prompt the need for a diversified portfolio. Floating Rate Notes offer stability, income, and protection against interest rate risks, making them a valuable investment option.

Strategy

Breaking down recent footy finals by the numbers

In a first, 2025 saw AFL and NRL minor premiers both go out in straight sets. AFL data suggests the pre-finals bye is weakening the stranglehold of top-4 sides more than ever before.

Sponsors

Alliances

© 2025 Morningstar, Inc. All rights reserved.

Disclaimer
The data, research and opinions provided here are for information purposes; are not an offer to buy or sell a security; and are not warranted to be correct, complete or accurate. Morningstar, its affiliates, and third-party content providers are not responsible for any investment decisions, damages or losses resulting from, or related to, the data and analyses or their use. To the extent any content is general advice, it has been prepared for clients of Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892), without reference to your financial objectives, situation or needs. For more information refer to our Financial Services Guide. You should consider the advice in light of these matters and if applicable, the relevant Product Disclosure Statement before making any decision to invest. Past performance does not necessarily indicate a financial product’s future performance. To obtain advice tailored to your situation, contact a professional financial adviser. Articles are current as at date of publication.
This website contains information and opinions provided by third parties. Inclusion of this information does not necessarily represent Morningstar’s positions, strategies or opinions and should not be considered an endorsement by Morningstar.