Watch stocks you care about
The single, easiest way to keep track of all the stocks that matter...
Your own personalized stock watchlist!
It's a 100% FREE Motley Fool service...
Bob Dylan once sang, "Oh, the times they are a-changin'." While these lyrics are not directly tied to marijuana -- although Mr. Dylan has certainly written many on the subject -- they are certainly apt when you consider America's attitude toward pot. Could changing attitudes present a risk to correctional companies?
America's mellowing out on marijuana
A recent CNN poll found that support for legalizing marijuana is soaring, with 55% of respondents supporting the legal use. This poll isn't an outlier; the results are consistent with other marijuana-related surveys. In short, people are becoming more comfortable with marijuana usage. Matter of fact, the survey notes that in 1987, 70% of respondents viewed smoking pot as morally wrong, today that number is 35%.
It's important to note the wording of this question. This question references the legalization of marijuana, something that has been enacted by very few legislatures. Many states have taken a mini-step: decriminalization. Although the words legalization and decriminalization sound similar, they are very different: Legalization is the formal process of making something legal; decriminalization is to punish offenses by means other than prison.
Marijuana policy led by states
The current environment of marijuana laws resembles a poorly designed game of chance. As of right now, there are more than 20 states that have some form of medical marijuana/decriminalization, two that allow marijuana for recreational purposes (Colorado and Washington), and the remainder keeping the drug illegal.
But as the chart shows, this is quickly changing. In 2014, 13 states have initiatives to legalize marijuana, 16 states have medical marijuana up for consideration, and five states have decriminalization on their agendas. Keep in mind this is on a state-by-state basis; the federal government still considers marijuana a Scheduled 1 controlled substance.
However, the federal government seems to have interparty struggles on this issue: the White House has been plagued with inconsistent policy announcements. In one of the higher-profile dustups, DEA head Michelle Leonhart publicly took a position seemingly contrary to that of her boss, Attorney General Eric Holder.
The other side of the aisle is inconsistent on this issue as well, with many Republicans torn between the libertarian view of laissez faire and protection of states' rights in one corner and the moral majority in another. In the earlier referenced CNN poll, one group was still firmly against the legalization of marijuana -- self-identified Republicans.
A shocking number: $31,286
The number that has united both liberals and libertarians, and has led to the decriminalization push: $31,286. That is the average each state spends to house one inmate per year. This outranks most government spending programs by a wide margin; for example, the average per pupil spending in the U.S. is $10,600 per year. For states, correctional spending is the second-fastest growth area of state budgets – trailing only Medicaid. And as of now, there is one company that benefits from that spending like no other—Corrections Corporation of America (NYSE: CXW ) .
The largest corrections company in the U.S.
Corrections Corporation of America, headquartered in Nashville, Tenn., bills itself as the leading provider of correctional solutions to federal, state, and local government, and business has been good. From its first contract for an INS facility in Texas, to its current size of 60+ facilities, the company has grown to a $1.8 billion per year revenue-producing giant.
However, top-line growth is slowing: The story of Corrections Corporation of America's revenue can be summed up in two periods 1993-2003 – 22.4% revenue growth per year – and 2003-2013 – 5.7% revenue growth per year. But the legalization of marijuana could be the biggest risk to this company's investment thesis.
Why Corrections Corporation of America investors should fear marijuana's legalization
A company with slowing top-line growth is one thing, many investments have to deal with growth deceleration – it is expected. Top-line drops, on the other hand, are harder to digest for investors. It is estimated nearly one-quarter of all prison inmates are non-violent drug offenders. Admittedly, that number includes more than just marijuana offenders; but considering that marijuana is the most-abused illegal drug, one should assume that a large percentage of non-violent offenders are marijuana abusers. If legalized, it is very possible Corrections Corporation's top line could shrink.
And even if marijuana isn't outright legalized by legislatures, changing attitudes still present a risk to Corrections Corporation of America's top-line figures. At its heart, the legal system is highly dependent upon public perception. Juries, judges, and attorneys are sensitive to the common zeitgeist. Right now, many taxpayers are asking whether it is worth it to pay $31,286 for a minor marijuana-related offense (and this doesn't even include the other costs of the adjudication process). In fact, some are considering this a cruel form of a handout and would rather reverse the flow of funds by decriminalization fines and fees.
Final Foolish thoughts
It is important for long-term investors to consider public attitudes and regulation in their investing thesis. To be fair, marijuana is still illegal in most municipalities and by the federal government. In addition, the harmful effects of marijuana aren't up for dispute.
But America seems to be more accepting of marijuana usage. So in this case, it appears less regulation actually presents a risk to Corrections Corporation of America and its investors should follow these developments closely.
Fearless, fact-based financial analysis is how The Motley Fool picks winners
They said it couldn't be done. But David Gardner has proved them wrong time, and time, and time again with stock returns like 926%, 2,239%, and 4,371%. In fact, just recently one of his favorite stocks became a 100-bagger. And he's ready to do it again. You can uncover his scientific approach to crushing the market and his carefully chosen six picks for ultimate growth instantly, because he's making this premium report free for you today. Click here now for access.