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Will Crime Continue to Pay for Them?
01/15/2014 8:00 am EST
Americans are changing their minds about marijuana legalization, so should for-profit prison stocks worry, wonders James Dennin on Kapitall.com?
Sentiment in the US towards the availability of marijuana has seen dramatic changes. In 2005 Americans disapproved of the legalization of marijuana by a wide margin, with almost two out of every three respondents saying they favored prohibition of the drug.
In eight short years that figure has almost completely reversed: the latest Gallup poll on the issue showed that 58% of Americans supported legalization, while only 39% opposed-a margin of 20%.
Policymakers are increasingly inclined to agree, as decriminalization avails a number of revenue streams without raising taxes. While so-called "sin taxes" have their share of opponents, the tax revenue from a legal market place for the drug has become harder to resist as factors like the recession and the sequester strain state budgets.
Colorado and Washington became the first states to fully legalize recreational use of the drug. And early estimates suggest that Colorado's shops brought in combined sales of more than $1 million on the first day alone. That figure might seem modest, but when you consider that the cash is being split up by only two dozen stores, and that the first customers often had to wait hours in the snow, the profits start to look more impressive.
It's still too early to find many safe investments in the marijuana industry. The drug carries a strong taboo and remains largely illegal in 48 states-which makes rounding up investors difficult. However, it's possible that investors looking to benefit from the reforms could have a play to make by looking at for-profit prison stocks.
For-profit prisons do big business in the US. The biggest, Corrections Corporation of America (CXW), has a profit margin pushing 30% on over $300 million in income. The company and its major competitor, GEO Group (GEO), have been consolidating for the last two decades-and CCA has changed its strategy to buying state facilities outright.
Now, while the exact figure remains ambiguous, it's estimated that as many as 40,000 inmates in the US are currently doing time for marijuana-related crimes. Many of the contracts between these companies and the state agencies they service place the burden of reaching occupancy levels on the state, regardless of how much crime there is.
This alone provides companies with some insulation should more states move in the direction of legalization. But there's no question that these firms have benefitted heavily from being located in a country that incarcerates twice as many people as most of the developed world.
So how will these prison stocks respond as Americans become more amenable to legal marijuana use?
Do you see investing opportunities among for-profit prison stocks? Use the list below to begin your own analysis.
1. Corrections Corporation of America (CXW): Operates privatized correctional and detention facilities in the United States. Market cap at $3.62B, most recent closing price at $33.69.
2. The GEO Group, Inc. (GEO): Provides government-outsourced services specializing in the management of correctional, detention, and mental health and residential treatment facilities in the United States, Australia, South Africa, and the United Kingdom. Market cap at $2.3B, most recent closing price at $32.37.
Analyst ratings sourced from Zacks Investment Research. All other data sourced from Finviz.
By James Dennin of Kapitall.com
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