The Return (and Ongoing Risks) of Private Prison Stocks

by Investment U Research Team
private prisons

Back in August, we published an article on the demise of private prisons. At the time, it was hard not to be bearish on the industry. The Department of Justice had released a report calling for the end of prison contracting. Shares of the two biggest prison companies, Geo Group (NYSE: GEO) and CoreCivic (NYSE: CXW), plunged almost 40% that week.

The report was just a part of the controversial industry’s problems. It came in the midst of a bipartisan movement to reduce the prison population. President Obama had recently broken a record for granting clemency to the most prisoners. And Congress was working to ease sentencing for nonviolent drug crimes.

In August, everybody expected these reforms to continue under our next president. Who, of course, was guaranteed to be Hillary Clinton.

Then November 8 happened. And it turned many assumptions on their heads. The bleak future of private prisons was one such assumption. Today, that “dying” industry looks like this...

private prisons

But the future of this industry is far from certain. Private prisons continue to be a moral gray area. By all accounts, they’re still less safe, clean and efficient than government facilities. That means that public opinion is a big threat to this rally.

Below, we’re looking at the return of this strange industry in more detail.

Why Private Prisons Are Rallying

This comeback has very little to do with regular criminals. Rather, the big Trump rally in private prisons reflects an expanding market for immigration detention facilities. They’re jail-like facilities where suspected illegal immigrants are held for screening, trial or deportation.

Immigration detention was already a cash cow for private prisons under President Obama. He’s deported 2.5 million people - more than any other president. And his administration still awards immigration detention contracts to CoreCivic.

So imagine the private prison industry’s prospects under Trump. It’s hard to pin down the president-elect’s exact policy positions, but Trump’s rhetoric on deportations has always been enthusiastic.

Early in his campaign, Trump suggested deporting every illegal immigrant in the country. That’s an estimated 11.3 million people. Then he walked back those remarks to focusing on the 3 million illegal immigrants with criminal records. He has also repeatedly called for the creation of special “deportation forces” throughout the nation.

In sum, the president-elect has big plans for immigration policy. And those plans may rely on using private prisons as detention centers. But that doesn’t mean that the ethical concerns with private prisons are out of the picture.

Unresolved Problems

That DOJ report wasn’t just some partisan fluff piece. It cited more violence among inmates in private prisons... poorly trained staff... inadequate medical care... flawed security measures... the list goes on.

In other words, the investigators found a litany of problems with private prisons. In many cases, they failed to protect inmates, staff and the general public.

Thus, this resurgence in private prisons could trigger quite a backlash. Instances of inmate abuse could anger left-wing observers. And the lackluster security around these facilities could be seen as a liability by Trump supporters.

In other words, the industry is still quite vulnerable to bad PR and political risk. Trump may be keen on deportations. But he’s also known for admonishing companies that shortchange the American people.

Investing in private prison stocks might be a good play. With Trump coming to power, they’re certainly back in the green. But their moral gray areas shouldn’t be ignored.

This is just one example of how the new policies of the Trump administration could transform the markets. To show you how to prepare your portfolio, The Oxford Club is hosting its first-ever Presidential Webinar. You can sign up for this free online event here.

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