Are There Private Prison Stocks in Your Portfolio You Don't Know About?

Image source: Getty Images.

Is the U.S. private prison system going to be shut down in the wake of the Justice Department issuing a memo calling for federal officials to let contracts with such prison operators expire or to "substantially reduce" their scope? Probably not.

But since the directive did follow an inspector general's report slamming private prisons as being less safe and secure than government-run facilities, it might have other agencies at the state level rethinking their relationships with private prison operators.

Locking up profits

There are two major, publicly traded private prison companies in the U.S.: Corrections Corp. of America (CXW -0.14%) and GEO Group (GEO -1.52%).

Shares of the two had been doing well this year prior to Justice's memo. Corrections Corp. stock was up slightly at the time, though shortly before then, it had been 26% higher, while GEO Group's shares had been almost 12% higher. Both, however, tumbled hard afterwards -- with Corrections Corp. plunging 35% in one day (it had been down as much as 52% at one point), while GEO Group finished the day down 40%, after having been down by half early on:

GEO data by YCharts.

Many mutual funds holding shares of private prison operators in their portfolios also had their stakes impacted in the downdraft that followed.

But if funds were holding onto shares before and after, that means it's possible you also own a piece of Correction Corp and GEO Group, probably through an IRA, 401(k), or other retirement plan.

Prisons on lockdown

Depending upon how you feel about private prisons, that may or may not be a problem, but those who object may not have even realized they were holding onto something they abhor.

There are four main reasons people oppose the use of private prisons:

• It's immoral for a private, for-profit company to incarcerate a person.
• Private guards may not be as well trained or paid, and thus may be less qualified.
• The purported cost savings from using private prisons may not be as large as touted.
• Private-prison companies have an incentive to push for tough laws like jail for nonviolent offenses or mandatory minimums.

Irrespective of the validity of the objections, private prisons, which have been around throughout history, have grown and spread in modern times. Corrections Corp. won a contract in 1984 to run an Immigration & Naturalization Service facility in Tennessee. Today, the prison operator owns or controls 74 correctional, detention and reentry facilities designed to hold 75,000 beds. It manages 11 additional facilities that are owned by the government, with 14,000 beds. GEO Group owns or manages 104 facilities worldwide with approximately 87,000 beds.

Welcome to the big house

Like the poor, crime will always be with us -- and the promise of a more cost-efficient model is likely what attracted mutual funds to invest in them in the first place.

So which widely held mutual funds own shares of Corrections Corp. of America, GEO Group, or both? Here are the top five holders in each:

Data source: Morningstar.

Other significant institutional holders include BlackRock, Invesco, and State Street, all investment giants with dozens, if not hundreds of funds. Vanguard, of course, is one of the biggest families of funds, and if there is a stock traded publicly on any of the exchanges, it's probably in one of its mutual funds.

For diversification, you can't beat these broad-based funds. But if you have biases against certain types of businesses, you will have to accept that you may own a piece of them regardless, even if yours is a very small stake.