Strategies: Trump’s Win Gives Stocks in Private Prison Companies a Reprieve
These two companies, both real estate investment trusts, are not household names. In fact, on Nov. 10, Corrections Corporation of America changed its trading name to CoreCivic. According to Jonathan Burns, a company spokesman, the move was part of a long-planned rebranding that emphasizes diversification into areas like inmate transportation and residential re-entry programs for former inmates.
On its website, CoreCivic, which is based in Nashville, says it houses nearly 70,000 inmates, which makes it “the fifth-largest corrections system in the nation, behind only the federal government and three states.”
The GEO Group, which is based in Boca Raton, Fla., and operates internationally — in Britain, Australia and South Africa — is close behind. The nonprofit Hamilton Project estimates that the two companies account for 85 percent of the private prison market in the United States.
But that market had appeared to be shrinking. Investors shunned the two companies over the summer when the Obama administration signaled its displeasure. A Justice Department memo concluded that privately operated prisons were inferior to those operated directly by the Federal Bureau of Prisons in three critical areas: They do not provide comparable services, do not save substantially on costs and do not maintain “the same level of safety and security.”
In July, there was a measles outbreak at an immigrant detention center in Arizona run by Corrections Corporation of America for Immigration and Customs Enforcement, a federal agency. State officials found fault with the way the institution handled it.
Private prisons began a resurgence in the United States in the 1980s with the law-and-order, privatization and anti-union campaigns of the Reagan revolution. They helped ease overcrowding in state and then federal prisons as inmate populations swelled, while budgets were constrained.
But in 2013 the prison population began to decline, a trend that seemed likely to continue, with the help of changes in sentencing laws, the rise of alternatives to imprisonment and a softening in parole policies.
On Aug. 18, Sally Q. Yates, the deputy attorney general, said in that Justice Department memo that the Federal Bureau of Prisons was “beginning the process of reducing — and ultimately ending — our use of privately operated prisons.” The memo was a bombshell: In one day, shares of CoreCivic (then Corrections Corporation of America) fell 35.5 percent. GEO dropped 40 percent.
From a purely financial standpoint, that horrendous market decline may have been an overreaction.
The Yates memo referred only to phasing out or reducing contracts with the Federal Bureau of Prisons. Those contracts amounted to less than 16 percent of the two companies’ revenue, according to filings with the Securities and Exchange Commission. Far more money — 44 percent of CoreCivic’s 2015 revenue, said Terry Dwyer, an analyst with KDP Investment Advisors — flowed from contracts for detention centers run on behalf of Immigration and Customs Enforcement and the United States Marshals Service. On Thursday, a Homeland Security panel recommended that those agencies keep using private prisons.
Even as the Federal Bureau of Prisons announced that it was ending a contract with CoreCivic to house inmates in Cibola County, N.M., CoreCivic promptly got a new contract to run the same center on behalf of Immigration and Customs Enforcement.
The Obama administration’s approach is “an inconsistent revolving door policy,” Carl Takei, staff attorney for the national prison project of the American Civil Liberties Union, said. The A.C.L.U. objects to private prisons as a matter of principle, he said, adding that they engage in “profiteering.”
“These companies by their nature depend on and profit from mass incarceration,” Mr. Takei said.
Pablo Paez, a spokesman for GEO, said in an email: “We do not believe in cost-cutting for profit sake as critics like the A.C.L.U. contend, instead we believe in running an efficient operation that provides adequate staffing and relies on state of the art technology for monitoring, communication and health care.”
Mr. Burns of CoreCivic said in an interview, “We have played a pivotal role in improving the conditions and environment for many inmates in many states, and we continue to do that.”
Oliver Hart, the Harvard professor who is one of this year’s Nobel laureates in economic science, has problems with for-profit prisons for other reasons. The difficulty is not just that the companies’ profit incentives don’t entirely align with civic interests, he said in an interview.
“There is a problem in contracts that we call residual control,” he said. While it’s relatively easy to shift a public service like garbage collection to private companies, he said, it’s not reasonable to do so for some government functions, like decision-making in foreign policy.
“You don’t want private contractors to have ultimate control over use of violence,” Professor Hart said.
“Prisons are somewhere in the middle” between garbage collecting and decision-making on war and peace, he added. “It’s generally better not to privatize prisons.”
But the market has concluded that the business may have its best days ahead of it.
“The outlook for the companies really changed overnight with the election of Mr. Trump,” Mr. Dwyer of KDP Investment Advisors said.
The new administration’s policies are not clear, but Mr. Trump’s statements have been starkly different from those of President Obama — and Hillary Clinton and Bernie Sanders, who each called for the end of private prisons.
In March, for example, Mr. Trump called the bulk of the nation’s prisons “a disaster” but added: “I do think we can do a lot of privatizations and private prisons. It seems to work a lot better.” And in an interview with “60 Minutes,” he said that up to three million undocumented immigrants were “criminals”: “We are getting them out of our country or we are going to incarcerate.”
The claim that there are three million undocumented immigrants in America who have criminal records is not supported by the facts, Mr. Takei of the A.C.L.U. said.
Still, because most detained immigrants are housed by private companies at a cost to the government of about $127 a day, any increases in incarceration of immigrants would swell the companies’ coffers.
Incarceration on the state level may well decline. California and Oklahoma approved referendums last month that may reduce the number of people in custody. The prison companies are compensating with “things like halfway houses with electronic monitoring and ankle bracelets,” Mr. Meliker, the Canaccord Genuity analyst, said.
The implications for investors are clear, he added: “There is a big upside for these companies.”
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