I first pitched this idea on Twitter about a week ago in response to celebrities lining up to bail out violent protestors. I figured this would be the almost ideal hedge on #WOKE culture that escalates and excuses violence.
The relative percent of the US population which is incarcerated is absurd by international standards. 2.3 million people are currently incarcerated in U.S. jails and prisons. The U.S. is 4% of the world’s population while housing 21% of its prisoners.
While county jails have let many people out amid the COVID-19 crisis far fewer have been released from prisons.
The prison companies Corecivic Inc (CXW) and The GEO Group (GEO) have rather low valuations, high yields, and have not recovered anywhere near as well as the broader stock market. Of course value plays tend to respond more slowly than capital compounding machines, but the downside risk on these is not too big unless we blow through the March lows.
| Ticker | CXW | GEO |
| P/E | 9.58 | 10.97 |
| Div Yield | 12.76% | 13.84% |
| 52 week high | $24.38 | $24.03 |
| 52 week low | $8.33 | $9.95 |
| current price | $13.79 | $13.87 |
| annual revenues | $1.99 billion | $2.47 billion |
| market cap | $1.65 billion | $1.68 billion |
| enterprise value | $3.65 billion | $4.42 billion |
Since the riots started & other REITs have taken off these stocks have also had a good week, but their movements have been smaller than those at mall companies like Simon Property Group (SPG) or Tanger Factory Outlet Centers (SKT). Of course their move to the downside was less extreme than some other names. Falling from $24 to $8 is losing about 66% of market cap whereas Tanger fell from $18 to $4 before bouncing back to about $9.
The election likely determines longer term outcomes for the prison companies, but either candidate could promote making marijuana legal & letting many nonviolent drug offenders out of prison.
This is likely a winning trade if the stock market holds up and sort of stagnates along or if there is a big rotation away from growth toward value plays. It also likely does well if the riots last right up until election and so many people are turned off by the #woke movement that Trump gets re-elected. And if people learn to ignore and tune out the daily COVID-19 death totals then that would remove some of that risk.
If Biden wins the presidential election and there is a Democrat sweep of congress there is a good chance a lot of prisoners would be released, particularly if the SJW movement remains in force after inauguration. If a blue wave sweep seems likely these could sell off in advance.
This is also likely a losing trade if municipal and state budgets get slashed so much that many prisoners are let out soon, or if on the continuing COVID-19 flare up there is a mass push to let prisoners out.
The narrative on prison labor already has a rather ugly past associated with it. The widely contagious disease spreading through prisons combined with some prison labor being used in poultry plants in Louisiana certainly has the seeds of another social justice movement. Some poorer countries have already done mass releases as COVID-19 spread. And a lot of people who end up in prison are from poorer backgrounds, so when visitors come to visit them many of them are also poor living in congested areas where COVID-19 is likely to spread.