Two of Friday's biggest percentage losers, CoreCivic Inc. (CXW) (down 6%) and GEO Group Inc. (GEO) (down 7.2%), suffered their fates at the hands of political rhetoric as U.S. senator and 2020 presidential candidate Elizabeth Warren put forth her plan to "ban private prisons." This is not the first time a politician has made such a pledge, and in turn sent associated private correction stocks lower.
Indeed, it was less than three years ago under then-President Barack Obama that the Department of Justice announced its Bureau of Prisons would stop using privately run correctional facilities. That sent shares of CXW down 35% in a single day (Aug. 17, 2016) in the midst of a 62% drop from June to November of the same year. That year was a presidential election year, and markets presumed Democratic candidate Hillary Clinton, also very vocal about her opposition to private prisons, would win and that the industry was doomed. However, once the votes were counted, private prisons earned a reprieve in the market's eyes, and CoreCivic climbed 165% from late October to the following February.
So, it appears as though we may see another potentially rocky period for private corrections stocks as the political rhetoric begins to heat up. Warren's call for a for-profit prison ban includes the Bureau of Prisons, U.S. Immigration and Customs Enforcement, and the U.S. Marshals Service, which collectively accounted for a significant part -- 48% -- of CoreCivic's 2018 revenue. Warren's proposal encompasses far more than the August 2016 Department of Justice announcement, which included just the Bureau of Prisons and threatened just 7% of CoreCivic's business at the time.
Still, it is one thing to make a statement on a hot-button issue and another to make it happen. The private corrections industry has emerged over the past few decades primarily due to lower cost. Strapped state and local governments have found partners in private corrections providers that effectively have lowered the costs of incarceration.
CoreCivic not only runs correctional facilities but also builds and owns them, taking on the capital costs traditionally born by governments. As of year-end 2018, CoreCivic owned 44 correctional facilities, 26 residential re-entry centers, and 27 properties leased to third parties and government agencies. The company claims to be the "largest private owner of real estate used by U.S. government agencies."
The idea of ending "for-profit prisons" is easier said than done. While the notion of companies making money on incarceration initially may invoke a negative reaction from many, and is thus a perfect hot-button political issue, there are still financial realities faced by governments. At this point this is all just political posturing, but as the election landscape becomes more clear it may create quite a roller coaster ride for the industry, just as it did three years ago.