Can These Stocks Lockup Some Profits for Your Portfolio?
Matthew is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
In a really fascinating read, “100 Mind-Blowing Facts About the Economy” one fact really bothered me. Fact number seventy-five said that, “America is home to less than 5% of the world's population, but nearly a quarter of its prisoners.” Are we really that bad over here or is it just unsafe to go overseas?
A few months ago I’d read that the leading private prison company, Corrections Corp of America (NYSE: CXW) was considering whether or not they should convert into a REIT. I’m always on the lookout for interesting cash producing assets to own for the long term and needless to say, owning a prison would certainly make for an interesting conversation. Without getting too deep into the debate as to whether private prison companies should even exist, the fact that they currently do exist and are publicly traded does beg the question as to whether or not they could provide some profits to your portfolio.
CCA is the largest private owner and operator of prisons in the United States. In addition to CCA, the other publically traded company is the GEO Group (NYSE: GEO). Between the two companies they rake in over $3 billion dollars in revenue while serving in a $74 billion dollar market. CCA with a market cap of $3 billion currently operates 67 facilities, of which they own 47 and have a total capacity of 92,000 beds. GEO which has about half the market cap of CCA at $1.5 billion currently operates 113 facilities with a capacity for 79,000 beds. As private companies manage less than 10% of our nation’s prison population, their ability to grow will create greater scale and more profits to investors.
However, the more you delve into the subject the less comfortable it becomes. Prison occupancy rates have been falling while crimes in private prisons are rising as they tend to be understaffed to increase profits. Additionally, a third of CCA’s contracts and half of GEO’s are set to expire this year meaning there is a lot of revenue in question. The public is growing increasingly concerned with what goes on in a private prison and the news media is bringing to light the recurring debate of profits over people. In a CNBC documentary called “Billions Behind Bars” they bring up so very concerning points, especially in regards to immigration detention. The political and headline risks cannot be understated.
What would seem to be a great recession resistant business, a counter cyclical business seems fraught with much more risk than the average investor needs within their portfolio. When an industry becomes a cash cow for their investor that’s funded by taxpayer dollars you can be sure that the general public will take note if there is any hint of abuse. We’ve seen this in the for-profit education sector with a for profit college company like Bridgepoint Education (NYSE: BPI) or virtual school K12 (NYSE: LRN) seeing their stocks coming under pressure as their industries have undergone higher scrutiny by both the public sector and regulators. While I am not predicting this as the same fate for private prison companies, they do have a tough road ahead of them.
The REIT concept currently being explored by CCA, however, is an interesting one. At one time Brookfield Infrastructure (NYSE: BIP) was planning on building out a platform of Public Private Partnerships and they’d owned an interest in an Australian Prison Hospital among other assets but have since sold their interests to focus on their core utility, transportation and timber businesses. The concept was a simple one, governments around the world needed new facilities and didn’t have the cash to build them nor did they want to expand their balance sheet and own them. These PPP’s stepped in to provide the capital to cash strapped governments providing a potential win-win situation.
From all I’ve read about private prison companies the real issue is in how they operate the prisons. While CCA is exploring taking their operating company and placing it in a Taxable REIT Subsidiary, another thought would be to simply spin off the real estate and work to grow that business by acquiring prisons from cash strapped governments and letting them run them. It would provide a cash infusion to the government and steady cash flow to shareholders without the risks and headlines that come from operating the prisons. Otherwise, I’d stay away from these two, the risks just seem to outweigh the rewards.
latimerburned owns shares of K12 and Bridgepoint Education. The Motley Fool owns shares of Brookfield Infrastructure Partners and Bridgepoint Education. Motley Fool newsletter services recommend Brookfield Infrastructure Partners, Corrections of America, and K12. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.