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Why The GEO Group Stock Tanked 17.5% at the Open Today

By Reuben Gregg Brewer - Jun 10, 2021 at 11:10AM

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The REIT got a shot in the arm yesterday, but it gave more of that back in early trading. Thank you very much, Reddit.

What happened

Shares of real estate investment trust (REIT) The GEO Group (GEO -0.30%) fell a quick 17.5% or so as trading got underway on June 10. But you can't look at today's price action without considering the price moves yesterday, when the stock rose around 70% at one point before giving up most of that gain to end the day higher by around 28%. Today's early drop was just a continuation of the pullback. 

So what

The big story here is that The GEO Group has gotten caught up in the Reddit message board mania that's quickly entranced Wall Street. With a sizable number of investors shorting the stock, essentially betting it will fall, it was highlighted as a short-squeeze candidate on Reddit. The goal is to quickly increase the stock's price to force short-sellers to cover their positions in order to limit their losses.   

A person holding their face with a computer showing stock losses in the background.

Image source: Getty Images.

The stock took off early in the day on the ninth, only to turn around and head lower. The downtrend continued into today. The fact is that The GEO Group, which owns and operates prisons, is facing very real headwinds, including high leverage and a political shift away from using for-profit prison operators. In fact, the company recently suspended its dividend to preserve cash. Since it's hard to suggest that The GEO Group's fundamentals support the price gains in early trading yesterday, that means investor sentiment is the driving force here (with a not-so-subtle push from that subreddit). The quick price turnaround, however, and early drop today just go to show that investors are still a mercurial and often unpredictable group over short periods.  

Now what

Most investors looking to build long-term wealth should avoid stocks where often-fickle investors' emotions are the key dynamic. That's basically like trying to time the market and exposes one to a lot of risk. In other words, most investors would probably be better off sitting on the sidelines with The GEO Group for now. 

Reuben Gregg Brewer has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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