Over the past several years, one of the best investments has been in shares of prison owners and operators. There are two publicly traded that dominate the industry in the United States – Corrections Corp. of America (NYSE:CXW) and Geo Group (NYSE:GEO).
Both stocks have provided investors with exceptional long-term returns. In 2012, both of these companies converted their businesses into real estate investment trusts for tax purposes. This added substantial value to these companies and the stocks began to spike, and an intermediate top was put in towards the beginning of 2013. Since then, the stocks have corrected about 20 percent and it looks attractive again.
There are several fundamental reasons to like these companies as long-term investments. First, there is a secular trend towards privatization in the prison system. According to Corrections Corp. of America, back in 2001, less than 7 percent of the U. S. inmate population was housed in a privately run prison. That figure exceeds 10 percent today. As private companies, Corrections Corp. of America and the Geo Group are answerable to its shareholders, and therefore, operational efficiency is a priority. Governments in the U. S. have failed to beat these companies’ strong track records for achieving efficiency, and now that it is short on capital, it is motivated to outsource prisons to these private companies.
Second, the prison industry is recession-proof. While a falling stock market will likely drag these stocks lower, a weak economy will not hit these companies’ earnings. Prisons are essential, and governments aren’t going to let convicts walk free unless there is a fiscal emergency that necessitates it. Furthermore, private prison operators may benefit from a weak economy. If a recession lowers a state’s income, it may be motivated to seek savings by privatizing prisons.