Will the For-Profit Prison Trump Bump Last?
Behold! This is the power of a few sentences of support on the campaign trail:
Share prices of the two largest public for-profit prison companies in the U.S. have surged following the election, both adding over a billion dollars to their market capitalizations.
Trump said this about the industry last spring at a town hall meeting: "By the way, with prisons I do think we can do a lot of privatizations and private prisons. It seems to work a lot better.”
So is this big share price bump from Trump worth chasing? Let's go over what the industry is facing to get an idea.
The chart above compares the relative share price gains of The Geo Group, Inc. (NYSE:GEO) and Corecivic, Inc. (NYSE:CXW), formerly known as Corrections Corporation of America, to the S&P 500.
Both are real estate investment trusts, obligated to return 90% of their profits to shareholders. As a result, they are normally a form of dividend play, with high yields of 7.08% from GEO and 6.88% from Corecivic.
Both are also about the same size, with roughly $2.8 billion market capitalizations.
The business model is pretty simple. They own prisons and other correctional facilities. They lease these buildings to the government, or they charge the government for the prisoners they house on a per-head basis.
The terms of the deals can become far more complex, but in the end, virtually all their revenue is government money that they have positioned themselves to collect.
Both companies work with state, local, and federal agencies, and GEO has an international presence as well.
Immigration, Detention, and Deportation
The surge in share prices is anticipation that a lot more business is going to come to both companies.
Essentially, they both rent rooms. The occupants are criminals, and the government pays the rent, but the big picture is that these companies try to maintain properties at low costs while filling them to maximum occupancy to pull in as much profit as possible.
With Trump's message of getting tough on immigration in particular, investors are anticipating a surge in demand, particularly from the Federal government, which is in charge of all immigration issues, prosecutions, and whatnot.
This would come from two sources. The Trump campaign vowed to stop the catch and release of asylum seekers who cross the border without documents and Trump himself has said he wants to deport 2 to 3 million "criminal aliens."
Even though Obama has deported record amounts of people, that could represent a massive surge, if done in the first term.
Between 2009 and 2015, 2.5 million have been deported, so Obama's last year hasn't been counted yet. George Bush the Second came in around 2 million.
So if Trump tries to hit his benchmark in one term, it would double the pace. If it stretched to two, it would still maintain all-time highs.
And the thing is, turning back immigrants means detention during due process before deportation, often for months.
"Detention is an inherent part of the machinery of deportation, and so I think we're looking ahead at massive expansion of our detention system," said Mary Small, policy director for Detention Watch Network, which opposes private prisons, to NPR. "And what we've seen over the last decade is that when the detention system grows that's mainly through the use of private prison companies."
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Even though share prices have soared, it isn't like there are clear skies for the industry. In fact, they have been battered around by lawsuits and the Dept. of Justice under Obama for years.
Part of the share price surge represents the newfound absence of that federal pressure.
Another is the mixed signals from an administration that didn't like for-profit prisons one bit, but couldn't get along without them.
While the Dept. of Homeland Security relies heavily on private companies to handle 70% of its detainees, and has been signing new contracts, the Department of Justice announced in August it wants to phase out all private prisons, including those that hold convicted immigrants.
You can see how investors would be worried about mixed signals...
Most of this pressure came from external sources though. Lawsuits alleging neglect and outright abuse have dogged both companies in the past.
Last year in particular saw some high-profile reporting that took very negative views of the for-profit prison system.
Investigative reporter Shaun Bauer wrote an excellent undercover exposé after becoming a guard that is bound to be on the short list for a Pulitzer. It was written for Mother Jones, I know, not exactly unbiased, but it was a phenomenal article. If you have an hour or so (seriously) it is here.
Then there is the reporting done by Seth Freed Wessler for The Nation, which relied on FOIA requests to get 9,000 pages of medical records and 20,000 pages of monitoring reports that cover the 13 privately operated prisons in the federal corrections system.
The combination of these reports is what really pushed the Dept. of Justice into action. Medical care in particular was not provided to many inmates, and that flies in the face of court precedent. There was no way around official investigations when there was the potential for it to be systemic.
And while these reports only cover the facilities used to house felons — not immigrants — they still could affect a sizable amount of income for both publicly traded companies.
Where Does This Go From Here?
So after all the troubles GEO and CXW have seen in recent years, the potential for vastly increased immigration detentions, and massive share price increases, what's next?
Here are the catalysts that will decide that question:
The pace of deportation — This is either positive or neutral. The only questions are how fast can it get started, and how serious is Trump about sticking to it for years on end.
A surge would dump revenue into both companies and drive up share prices. If the system is overburdened to the point it can't handle more, it'd take years to get it moving faster.
And if Trump just wanted to secure some votes and only intends to check off a box and move on, this rally won't go far. I'm sure the sentiment is there, but the follow through is always the problem in politics.
Dept. of Justice changes — This is negative or neutral. Regardless of whether Sessions is confirmed as the next Attorney General, whoever heads the DoJ can't just ignore the issues its inspector general and other investigations have raised.
It's a bit late to just chuck that out, considering this is related to Constitutional prohibitions against cruel and unusual treatment.
It is very possible — and I'd say extremely likely — to continue using private facilities and companies and just demand compliance and greater oversight. The only question for share prices then is how much it would cost the companies.
Overall though, there seems to be far more positive than negative potential here.
The Bureau of Prisons, at its height, housed only 15% of federal inmates in for-profit prisons. ICE holds around 70% percent of its detainees in private jails. The catalysts are heavily skewed to the positive as a result, with a small chance for a DoJ curve ball.
Shares of both companies seem to be essentially in a holding pattern while we wait for further news. There hasn't been a fade, nor should we see one as long as the Trump administration doesn't wait long to make immigration policy announcements.
After that, it is back to the drudgery of quarterly earnings reports, managing occupancy and properties, and paying dividends to shareholders, while everyone waits to see if detention and deportation figures match the rhetoric.
Overall, I think we'll see share prices of both companies higher than they are now in a year's time, with both maintaining dividend payments around 7% as interest rates tick up a couple times.
Just understand that both stocks are in a pretty unsavory business, are entirely dependent on governmental policy, and aren't about to invent a new and improved prison.
Adam's editorial talents and analysis drew the attention of senior editors at Outsider Club, which he joined in mid-2012. While he has acquired years of hands-on experience in the editorial room by working side by side with ex-brokers, options floor traders, and financial advisors, he is acutely aware of the challenges faced by retail investors after starting at the ground floor in the financial publishing field. For more on Adam, check out his editor's page.