Flickr / mikecogh.

As an investor, I am always on the lookout for unique investment opportunities in the broader market. When I came across prison stocks, I was intrigued.

The U.S. has the highest prison population in the world, and with only two large publicly traded companies in the space, I investigated further to see if there was value for investors.

Corrections Corporation of America (CXW -0.99%) and GEO Group (GEO -1.86%) are both operators in the private prison business. After years of overcrowding, notably in states such as California, private prisons provide a solution to a much needed problem. Capacity in "The Golden State" was recently operating at more than 145%, and the overall Federal prison system is at 136% capacity.

Facilities are aging as well, several of which over 100 years old and need to be completely replaced. Private prisons represent less than 10% of a $74 billion market, so there should be significant room to grow.

Comparison
A little over one year ago, both companies completed a restructuring that allowed them to become a real estate investment trust (REIT). REITs are required to pay 90% of their taxable income to shareholders.

Currently, Corrections Corp. is paying a 6.20% dividend yield, while GEO Group is currently yielding 6.70%. Facilities in both companies have an estimated 75-year life, and customer retention rates above 90%.

Barriers to entry are significant as well. Both companies have contracts with the U.S. Marshall Service (USMS) and U.S. Immigrations and Customs Enforcement (ICE). So what sets them apart?

Founded in 1983, Corrections Corp. is the largest owner and operator of private prisons in the U.S. With 69 facilities (53 which are controlled or owned), the company has a portfolio of more than 68,000 beds. Its average facility is only 16 years old.

Founded in 1984, GEO Group operates 97 facilities (77 which are controlled or owned), the company has a portfolio of more than 77,000 beds. Seven of its facilities are international, covering Australia, the United Kingdom, and South Africa. 

The GEO Group Source: Company Website

On the surface, it appears that GEO Group is bigger, but many of its facilities include youth services and community-based centers.

Corrections Corp. also has similar facilities, but its focusing more on full sized prisons, which result in higher revenue and profit for the business. Another difference is that Corrections Corp. has an occupancy rate in the "mid-80% level" while GEO Group's rate is 96%. This is more favorable for Corrections Corp., assuming they can grow their occupancy rate.

Controversy
The private prison model certainly has its critics and controversies. There are numerous accusations that the government guarantees high occupancy rates when contracts are awarded, as well as outcry regarding the treatment of inmates.

Both companies have spent a lot of money on lobbying to change prison reform laws as well. It seems that the overall public perception of the private prison system is not too positive.

Other challenges
Surprisingly, the prison system is not recession proof.

Between 2008-2011, 850,000 fewer arrests were made annually compared to 2004-2007. If the U.S. enters another recession, this could hurt profitability for both companies. Also, if there are changes in government policy in any of the three countries GEO Group has operations, it could pose a threat as well.

Takeaways
Despite the political and public headwinds, both companies should continue to perform well. Like it or not, the private prison system was created more than three decades ago, and the business model has proven to work so far.

Since both companies are REITs, value investors receive dividends, while still enjoying long-term growth.

Either company would be a good fit for a portfolio. However, my vote goes to GEO Group, since it sets itself apart by having international exposure, and currently has a higher dividend yield.