Democratic presidential candidate Bernie Sanders has put private-prisons on his platform, and his new plan to end all of the US government's contracts with private detention-centers could have a major effect on the publicly-traded companies that hold these contracts.
Last week, Sanders introduced the Justice is Not For Sale Act , a bill aimed at lowering the nation's incarceration rate by reducing the power of the the private-prison industry. The senator from Vermont described the justice system as "broken" and gives prison companies a financial incentive to create an environment that promotes recidivism.
"We need to start treating prisoners like human beings," Sanders said. "Private companies should not be profiting from their incarceration. Our emphasis must be on rehabilitation, not incarceration and longer prison sentences."
The bill would effectively kill the private-prison industry, which depends on government contracts. The two biggest for-profit prison companies are the GEO Group GEO and the Corrections Corporation of America CCA , generating a combined $3.2 billion in annual revenue.
Currently, both of these stocks have a Zacks Rank #3 (Hold). Both GEO Group and CCA are structured as equity REITs, and they are responsible for owning and operating their prisons. It's also been a rather rough year for both stocks, as share prices have dropped 25% and 16% on the year for GEO and CCA respectively.
On the same day that Sanders announced his plan, US Immigration and Customs Enforcement (ICE) awarded its family-detention program to a subsidiary of the GEO Group. Immigration is a major lobbying point for these companies, and between 2008 and 2010, CCA and GEO spent $11 million lobbying on immigration issues.
While the private-prison industry has an incentive to keep immigrants behind bars, it also benefits from return prisoners and crowded cells. This, to Sanders and other supporters of public prisons, is exactly why the government should be in charge of the incarceration system; helping prisoners reform and providing social welfare is better for society as a whole by hopefully reducing crime and eventually lowering the burden of the government to take care of criminals.
It makes sense that private-prisons would be big business in the US, as America has more prisoners than any other nation in the world. As one could assume, GEO and CCA won't go down without a fight and are sure to lobby against Sanders' plan.
Regardless, investors should be weary of prison stocks as justice-system reform becomes an increasingly hot issue. Other candidates have also put this reform on their platforms, including Republican Senator Rand Paul, whose REDEEM Act would reduce the number of nonviolent drug offenders behind bars. Simply put, less prisoners means less money for the private-prison industry, and these prison stocks could slide even further.
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