The Retired Investor: Jailhouse Stocks

Investors appear to be "dancin' to the Jailhouse Rock" ever since the election of President-elect Donald Trump. Private prison stocks have roared back to life as the deportation of immigrants becomes a reality.

 

Day One, according to the Trump team, the new administration will launch its promised plan to deport millions of illegal immigrants. Criticisms that the cost of such an endeavor would bankrupt the country have gone largely unheeded. Trump has responded that he has "no choice" and "no price tag" when it comes to what the media terms as the largest deportation in U.S. history. 

 

Wall Street believes that the appointment of hardliner Tom Homan as Trump's "border czar," could mean expanded contracts on the back of increased US Immigration and Customers Enforcement (ICE) enforcement combined with partnerships with U.S. Marshals and the Federal Bureau of Prisons.

 

Some policy groups that specialize in immigration have predicted GDP could shrink by $1.1 trillion to $1.7 trillion but according to most voters that would be a small price to pay to rid the country of the estimated 11 million plus illegals in the country. As a result, with investors' belief that the sky's the limit in spending, it is no wonder that the shares of the two largest prison stocks, GEO Group and Core Civic, have gained more than 80 percent in a matter of days.

 

These companies own and operate a nationwide network of prisons, immigration detention centers, and correctional facilities under government contracts. The latest figures (2022) of those incarcerated were just under 91,000 U.S. residents and upwards of 55,000 migrants. That was during Trump's first four years.

 

Thanks to lobbying efforts by both firms, there exists a hand-in-glove connection between the industry and federal policy decisions. That was worth $1.05 billion in sales (43 percent of revenue) from ICE for the Geo Group in 2022.

 

Core Civic received $552.2 million from ICE during the same period equaling 30 percent of total revenue. Both companies have been working with the Trump transition team to expand their capacity. Pro-private prison government benefactors argue that these companies, structured to generate profit while operating like public institutions, reduce overcrowding throughout the penal system. They reduce costs and offer specialized management expertise as well.

 

On conference calls last week, the management of both companies used words such as "unprecedented opportunity" and, in the case of Damon Hininger, CEO of CoreCivic, "It feels like with this election this year, we're heading into an era that we really haven't seen, maybe once or twice in the company's history." That was music to the ears of traders and investors alike.

 

Building prisons, especially given the number of illegal immigrants targeted by the incoming Trump administration, will not be built overnight. A 500-bed facility in San Diego, for example, costs $118 million to build. And running a 1,000-bed prison can cost as much as $143 million a year. However, the plan is to deport illegals, not just throw them in jail where taxpayers will be required to foot the bill for their incarceration.

 

As such, behind the scenes, there is much discussion among planners of "soft-sided" detention facilities ( tents with jail cells in them) as an interim step. That could reduce costs considerably. How this could be accomplished and still provide basic humanitarian treatment is another discussion. Given the present mood of the country, many might not even care.

 

Before you decide to buy into this jailhouse rock as well, know that there was a similar mood of euphoria surrounding these stocks back in the early days of Trump's first term. At that time both companies' stocks traded at or near long-term highs. Today, however, despite their gains, they are still trading far below those 2017 gains.  

 

Bill Schmick is the founding partner of Onota Partners, Inc., in the Berkshires. His forecasts and opinions are purely his own and do not necessarily represent the views of Onota Partners Inc. (OPI). None of his commentary is or should be considered investment advice. Direct your inquiries to Bill at 1-413-347-2401 or email him at bill@schmicksretiredinvestor.com.