Shares of prison operators CoreCivic (CXW 4.58%) and The GEO Group (GEO 4.17%) rose 11% and 12%, respectively, in early trading on Jan. 27. That said, both stocks are off dramatically over the past year. There's a connection here.
Both CoreCivic and The GEO Group do something that the government could, and often does, do itself: operating prisons. Hiring private companies to do this work has come under increasing scrutiny, pushing the shares of these companies notably lower over the past year. CoreCivic's stock is down 57% and The GEO Group is off by 48% over that span. The concern isn't unreasonable, noting that The GEO Group has lost two government contracts in three months. But the biggest fear of late has been that the new administration in Washington D.C. would act to curtail the outsourcing of the U.S. jail system.
That fear actually did come to fruition with an executive order from the new president calling on the Justice Department to curtail its use of private prison operators. The interesting thing is that the order didn't include the Department of Homeland Security, which controls U.S. Immigration and Customs Enforcement (often shortened to ICE) -- a heavy user of outside prison contractors. Also, contracts currently in place would likely need to roll off before they are canceled, meaning there's some lead time before these companies feel the full hit. In the end, it appears that the order will impact GEO and CoreCivic's operations less than investors had, perhaps, feared. Now that Wall Street has had some time to think a little more about the situation, the stocks rebounded a little.
There's no doubt that CoreCivic and The GEO Group are facing material headwinds right now, largely of the political variety. Politics is part of the game, however, when you count the government as your largest customer. Long-term investors looking at the big price moves today, meanwhile, should think carefully about the political environment and make sure they fully understand each of these companies before considering buying either of these stocks.