Tuesday, November 22, 2011

Bearish on private prison stocks if mass-incarceration bubble bursts

Over the past several years Wall-Street analyst types have been touting private prisons as a wise long-term investment, primarily for three reasons:
  • The rise of mass incarceration over the last three decades, assuming the trend will continue
  • State budget cuts reducing the likelihood that state governments will spend to build more prisons, and
  • A massive increase in immigration detention policies that began under Bush II and escalated dramatically under Obama.
So I was interested to notice that Market Intelligence Watch, which has been bullish on private prison stocks for a quite a while, in the last couple of months issued statements about the two largest private prison firms - Corrections Corporation of America and Geo Group declaring both suffer from "bearish technicals," which would be much closer to my own assessment. Geo stock recently hit a 52-week low, down 30% from just a year ago.

For several years now, Grits has believed that, examining the underlying fundamentals, both firms (particularly GEO) are far too laden with debt to justify bullish advice to investors. GEO has warned in corporate filings that its debt load could soon require them to divert money from operations to pay for debt amassed to gobble up competitors. Similarly, CCA's latest 10-K report on file with the SEC says its large debt could "require us to dedicate a substantial portion of our cash flow from operations to payments on our indebtedness."

Even more than their massive debt loads, though, a bigger potential problem for these companies may be the possibility that we're nearing the end of the largest incarceration boom (read: bubble) in the history of the planet. The three bulleted factors above all could easily reverse in the next few years. More states are contemplating de-incarceration measures because of budget shortfalls, for example, and states like Texas have seen their incarceration rates decline. If states implement such policy changes on a wider scale, it could reverse the upward trend mentioned in the first bullet and debunk the premise of the second - that incarceration rates will continue to increase even if states can't afford new prison construction.

Meanwhile, the boom in immigration detention is a short to medium-term phenomenon at best, driven largely by nativist sentiments that will not prevail long-term in political circles because of their radical impracticality. Even Rick Perry has suggested a program to let the 12-14 million undocumented immigrants get visas to stay here legally, while bipartisan proposals for comprehensive immigration reform, like the bygone McCain-Kennedy legislation, would likely go even farther. Immigration detention on its present scale is at best a short-term fix that will decline dramatically whenever a long-term political solution, of any sort, is finally reached. The companies' long-term debt, however, won't go away just because their number of contract beds decline.

If Grits is right that we're nearing the end of America's mass-incarceration bubble - and admittedly that may be wishful thinking, though I believe there are signs of a sea change in both elite and public opinion on the topic - then in coming years these companies' high debt loads will become entirely untenable. As CCA put it in their 10-K:
A decrease in occupancy levels could cause a decrease in revenues and profitability. While a substantial portion of our cost structure is generally fixed, a significant portion of our revenues are generated under facility management contracts which provide for per diem payments based upon daily occupancy. We are dependent upon the governmental agencies with which we have contracts to provide inmates for our managed facilities. We cannot control occupancy levels at our managed facilities. Under a per diem rate structure, a decrease in our occupancy rates could cause a decrease in revenues and profitability. When combined with relatively fixed costs for operating each facility, regardless of the occupancy level, a decrease in occupancy levels could have a material adverse effect on our profitability.
These companies' biggest nightmare would be a combination of drug legalization and comprehensive immigration reform. Again from CCA's 10-K:
The demand for our facilities and services could be adversely affected by the relaxation of enforcement efforts, leniency in conviction or parole standards and sentencing practices or through the decriminalization of certain activities that are currently proscribed by our criminal laws. For instance, any changes with respect to drugs and controlled substances or illegal immigration could affect the number of persons arrested, convicted, and sentenced, thereby potentially reducing demand for correctional facilities to house them.
Investing in private prisons basically is a wager that the United States has such a dysfunctional political system that we can't solve the immigration question or scale back the drug war, ever, and for many years that's seemed like a prescient gamble. Betting on the intelligence and competence of government officials will always get you poor odds. But if that longshot comes in and America's mass-incarceration bubble finally bursts, investors in both these companies will take a huge hit. The "bearish technicals" identified at CCA and the GEO Group may just indicate that, at this particular point in history, those long odds could be getting shorter. I certainly hope so.

23 comments:

Anonymous said...

Well, we know their lobbyists will be out in full force during this election cycle.

ckikerintulia said...

From my biased moral perspective, there's something inherently immoral about prison for profit.

Rev. Charles

Sheldon tyc#47333 said...

Modern day slave trade is alive and doing well in America. May all the people who are profiting from others misery, who are banking on the destruction of the land of the free home of the brave, who dishonor the sacrifices of our soldiers who died for our freedom, please drop dead ASAP. How dare you profit by robbing our freedoms. If you can drop dead sooner than ASAP, please feel free.

Anonymous said...

I think our economic system is not working right.
Having one of the biggest prison populations in the world shows that a lot of people are not able to function in America. Some people have to resort to stealing or being in an under-ground economy to survive. And now with so much of a person's life recorded on computer files some people can never start over.

I don't think this country would have reached the pinnacle of the the 1950's if today's attitude of being so judgemental about everyone was in place. Sure they investigated a person's politics (make sure you're not a commie) but they did not have an indepth rap sheet a on activities done since childhood.

I wonder what happened in America that something like the Prison Corporation of America was created. What sick folks must work there.

RSO wife said...

There is something inherently wrong with a nation that spends more on prisons than on education and/or health care. There is also something drastically wrong with Texas since we lead the nation in teen pregnancies and high school drop outs but have more people incarcerated per capita than any other state. What's wrong with this picture, private prisons not withstanding.

FleaStiff said...

Haven't institutional investors in the private prison sector of the market been moving funds out of the industry and re-positioning their investments to focus on Sober Living facility acquisition and management?

Anonymous said...

When you have at least two generations of people who view a free public education as an entitlement rather than a valuable gift, what do you expect. We've tied the hands of teachers and school administrators when it comes to discipline. Parents, who view the public school system as free-babysitting, are allowed to dictate how their child is punished for misbehavior in school. And at the same time, they couldn't care less about whether their child completes their homework or can actually read and write. But then we complain that the "system" has failed when these same disruptive youth become wards of the state in the criminal justice syestem. And please don't get me started on this notion that there is a natural "right" to free public healthcare. The one paramount purpose of government is to protect us from all threats, foreign and domestic. I'm not sure when this notion came about that it's the responsibility of the government to provide us with a teat to suckle on from cradle to grave, but it's just about to bankrupt this country. Here's a novel idea: How about people becoming responsible for their own well being and raising their children? I personally have no problem with government making sure there is enough prison space to protect us from those who are a threat to our lives, liberty and property. It's certainly better spent there than on this abysmal failure we call a public educational system.

Phillip Baker said...

It has always seemed to me that there are certain government functions that cannot constitutionally be outsourced, and one is imprisonment. Taking the freedom of a citizen and forcing him to live in a cage for years ought to be seen as a very grave thing, not the first option for most cases.

As to Anon 8:51, wake up and smell the 21st century coffee. Free public education allows society to tap and develop all the talent in our children, not just those few who can afford to pay. And listening to Texans gripe about the rotten education system is always laughable. How about trying actually funding education, instead of piously supporting the concept on the lowest financial support in the country. You get what you pay for. Then opting almost exclusively for the highest cost punishment - incarceration- just devours our tax dollars, when there are far more effective and far less costly methods. Quit criminalizing everything, divert non-violent property and drug cases to community programs and reserve prisons for only the serious violent offenders.

And btw, the function of government goes far beyond just defending the country and making business easy. There is the common welfare of the people, including making sure all have access to health care. I'm not ready to watch people die because they couldn't pay for care. Is that what you propose, 8:51?

Gritsforbreakfast said...

8:51, in Texas the idea that "free public education as an entitlement" goes back far more than two generations. Failure to provide public education was one of the complaints articulated in the Texas Declaration of Independence.

Art. 7, Sec. 1 declares, "A general diffusion of knowledge being essential to the preservation of the liberties and rights of the people, it shall be the duty of the Legislature of the State to establish and make suitable provision for the support and maintenance of an efficient system of public free schools."

Anonymous said...

And what happens when a large percentage of the population doesn't care if their kids are educated or not? They didn't care about their own education and they certainly don't care about their kids getting one. And heaven forbid if you should attempt to punish one of their children for disrupting class and keeping other children from learning. The idea of the government educating children back in 1836 was a good one--back when parents really appreciated the fact that having their children become educated for free was an invaluable commodity and a key to a better life for their kids. Unfortunately, too many parents don't see it that way anymore. Ever heard that old saying "you can lead a horse to water but you can't make him drink?" That's what we're doing with way too many kids these days. Don't believe me? Ask any teacher or admininistrator in a public school setting---especially in most urban schools. If the students don't care, and the parents don't care, these educators are saddled with an impossible task. At what point to we stop pouring good money after bad?

Gritsforbreakfast said...

11:32/8:51, there are grains of truth in what you're saying but they're so wrapped up with all the lies, distortions and delusions that it's difficult to parse. My point was that you were completely clueless when you questioned the source of Texas' commitment to free public education, which goes back far beyond 2 generations.

Should schooling be mandatory? That's a different question for a different blog. I was just pointing out that you're FOS, not trying to launch an off-topic debate on "what's wrong with kids these days."

Anonymous said...

Sheldon -
"How dare you profit by robbing our freedoms."

I suppose you didn't do anything to get yourself locked up?

Anonymous said...

My point, GFB, was that it's probably the last 2 generations of Americans who no longer appreciate the real value of a free public education. Instead of truly appreciating how lucky they are that the taxpayers give them this opportunity, they whine and complain about having to get up early to get to school, how they have too much homework, and how they are unfairly disciplined. Unfortunately, this "dead weight" is cluttering up the system for the few who genuinely want to learn. And for many of these "takers," the only difference between public school and prison is that they can have three free meals a day instead of two.

Don't believe we've become a nation of uneducated idiots who depend of the government to wipe their bottoms and tell them how to live their lives? We are informed this week by the U.S. Department of Homeland Security (no less) that it can be dangerous to use a deep fried turkey cooker. Maybe Ron Paul isn't such a bad candidate after all. I've seen it all!

ckikerintulia said...

The second President of the United States--I don't know about the first--but I do know that John Adams was a strong proponent of free public education.

Gritsforbreakfast said...

And what exactly, 12:04, does that tell us about whether or why investors should be bullish or bearish on private prison stock prices? I fail to see the point of your complaint, nor what it has to do with the subject of the post.

john said...

Read former Asst-HUD Secret. Catherine Austin Fitts' book, "Dillon Read & Co. and the Aristocracy of Prison Profits, available free on the web as ".... Stock Profits." But you can still find the old version.
I hope you are right it's a bubble. Non-crimes have always been pumped way up to fill those prisons and generate revenue from all angles. Why would the land of most liberty be the one of most prisoners? Corruption at high levels, high crimes & misdemeanors, robber-baron bankers and communitarians. And the NRA stands down. We were RAISED and rote-conditioned to stand down.

Anonymous said...

Anon 12:04 makes a good point and I don't care if it has anything to do with bearish prison stocks or not!

Gritsforbreakfast said...

9:47, I didn't detect any "point" at all in those rants, they're just tired, off-topic over-generalizations that were irrelevant to the subject at hand. That commenter never made a "point" in the sense of engaging in debate or argumentation, just a "complaint" about people s/he doesn't like.

Any thoughts on the future of private prisons?

Anonymous said...

Should schooling be mandatory?

You try to force them to attend school!

Maybe we look at the population we are now trying to educate. Their numbers are exploding while those who appreciate education are becoming extinct.

The Comedian said...

11:32/8:51, You appear to be lacking in education yourself. Grits owned you and you still kept on pontificating after displaying your gross ignorance about public education!

Whenever you generalize about anything, especially a large group of individuals, you are automatically wrong. For example, I am of English descent, does that make me stiff upper-lipped? But I am also of Irish descent, so does that make me a drunkard? I am also of German descent, so does that make me crave sauerkraut? And I am also of Polish descent, so I guess I need lots of help when changing a light bulb.

Anonymous said...

Considering that elected officials can make bank on "inside trading," it would be very interesting to see a list of the names of every official who has made money off these private prison company stocks. Not to mention the "gifts" from the companies' lobbyists...
Bull or Bear, this is nothing more than vile sewage and a perversion of tax payers money.

kamagra said...

For me prisoners who serve their sentence on minimum especially when they're old should given parole. After all they all renew their self.

kamagra said...

Prison profit should not be benefit by others. People should think of profiting in a good way not the bad.