Orange is the new gold: Prison stocks win in Trump's America

Nightmarish as the past two months have been for immigrants threatened by detention or deportation, it has been a marvellous time for two companies that stand to benefit from the Trump administration's policies.

Those two companies have bland names - the Geo Group and CoreCivic (formerly Corrections Corporation of America) - that don't signal their primary business: operating for-profit prisons and immigration detention centres for states and the US federal government.

The worse the news for immigrants and their lawyers, the better it has been for the two companies.

When a member of the Trump administration issues a memo or executive order, gives a speech or tweets about the crackdown on immigrants, shares of the two companies rise: Since the election, CoreCivic's stock price has climbed 120 per cent, and Geo's has gained 80 per cent.

Already in 2017, CoreCivic is up about 30 per cent; Geo - which is also the largest private prison company in Australia - has gained about 20 per cent.

"We are strongly opposed to the Trump administration policies on immigration," said Carl Takei, staff lawyer for the national prison project at the American Civil Liberties Union . "But those policies are great for these companies."

It was only last summer that their entire business model seemed to be in danger. The Obama administration decided to phase out their use by the federal Bureau of Prisons, and the companies' shares plummeted.

But Trump's election victory almost instantly pulled the two companies out of their slump. That was only the beginning.

Business of incarceration's new boom

Investor expectations that the actual business of incarceration and detention will expand under Trump have fuelled their levitating share prices.

"It looks as though Geo and CoreCivic have several years of sharp growth ahead of them," said Michael Kodesch, an analyst with Canaccord Genuity. "Based on that, they still look undervalued."

For one thing, Jeff Sessions, Trump's new attorney general, announced last month that the federal Bureau of Prisons would continue to rely on private prison companies.

That reversed an August decision announced by Sally Yates, then the deputy attorney general. (Yates stayed on as acting attorney general in the Trump administration's first days, but the new president fired her on January 30 when she refused to defend his executive order closing the nation's borders to refugees and people from certain predominantly Muslim countries.)

In her memo in August, Yates said the private prisons "compare poorly to our own bureau facilities" on financial grounds, adding that they lagged in rehabilitative services like educational programs and job training.

Yates also pointed out that the federal prison population had begun to decline, thanks to revised sentencing guidelines and other reforms.

But in a terse repudiation of the Obama administration, Sessions said the Yates memo had "impaired the bureau's ability to meet the future needs of the federal correctional system.

"Therefore," he said, "I direct the Bureau to return to its previous approach." That reversal helped bolster the prison stocks.

'Business is business'?

Even more important over the short term is the administration's declared policy of cracking down on unauthorised immigrants with waves of deportations, detentions and incarcerations, a program that will require a vast expansion of federal resources.

Financial analysts say this could mean that newly detained immigrants will flow into underused buildings owned by the two companies, filling "idle" space and significantly bolstering profits.

"The deportation crackdown is doing very good things for these companies," said Terry Dwyer, an analyst with KDP Investment Advisors. "On a personal level, it leaves a sour taste in my mouth, but I guess business is business."

When the companies' executives reported earnings in February, it was too early for hard numbers on how the shifts in US policy were affecting their companies' bottom lines, but their excitement was evident.

In a conference call with Wall Street analysts on February 22, for example, Geo's CEO George C. Zoley said that when it came to protecting the southern border of the United States, his company was "the largest provider of detention services to the three federal agencies" involved: Immigration and Customs Enforcement, Customs and Border Protection and the Marshals Service.

What the country is seeing, he said, is "really an escalation of capacity need for all three federal agencies as a result of the president's new executive orders." Geo, he said, is prepared to help meet those needs.

Zoley spoke in detail about the probable impact of one change ordered by Trump, the end of the so-called catch-and-release program. Under that effort, as Zoley put it, "As people were caught illegally crossing the border, they were held very temporarily and just let go instead of being detained."

Thousands of beds required

Now that Trump has ordered that many of those people will no longer be released immediately, Zoley said, the government needs "detention and informal processing," a service that will require "several thousands of beds" more.

Zoley said the federal government had been conducting "a national canvassing of the available capacity of the entire country to help assist ICE in this new, expanded, more aggressive border security program."

The beauty of this, for Geo, is that it could expand its business in three ways. Initially, Immigrations and Customs Enforcement will need more places to detain immigrants "because the border patrol will catch the individuals and then send them to an ICE facility," Zoley said.

But that's only part of the picture. "Subsequently, there will be a need by the US Marshal Services for those people that have committed criminal acts and need to be detained for adjudication," he added.

And further down the line, Zoley said, the federal prisons will need to incarcerate "those people who have been sentenced and need to serve their time."

Wall Street has been calculating how many additional detainees and prisoners are likely to be generated for the two companies by the Trump crackdown. From a purely financial standpoint, the numbers are encouraging, even though detentions of immigrants on the southern border dropped in February.

Geo has room to detain roughly 5000 additional people, said Kodesch, the Canaccord Genuity analyst. And if the company is able to fill that capacity, it will mean a hefty increase in its earnings.

Both Geo and CoreCivic are real estate investment trusts, and Kodesch estimated that the detention surge could result in an increase in operating earnings of $US50 million, or more than 12 per cent.

CoreCivic has about 8700 "idle beds," he said, and if it manages to fill them, it would mean an earnings increase of $US76 million, a gain of about 20 per cent.

Eventually, the companies could build new prisons and detention centres, Kodesch said.???

Tied to Trump's fortunes

The private prison stocks have been hurt by some political developments. They dropped for a few days after new State Attorney Sessions, viewed as a bullish influence on the stocks, came under pressure for failing to disclose to the Senate that he had met twice with the Russian ambassador, amid a furor over possible Russian meddling in the presidential election.

But Trump has stoutly backed Sessions, and "the stocks responded positively," Kodesch said.

The prison companies are intimately tied to the government, and major setbacks for the Trump administration could derail them. For now, though, the market loves them.

The New York Times

This story Orange is the new gold: Prison stocks win in Trump's America first appeared on The Sydney Morning Herald.