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Lock Down Profits With Corrections Stocks
By Michael Brush
January 27th, 2005
It’s a grim investment theme, but
the hard truth is that several powerful macro-trends suggest private prison
companies will see solid growth in the coming years.
· Under
anti-terrorism laws passed in the U.S., the Bureau of Immigration and
Customs Enforcement (ICE) will step up border patrols and make more arrests
over the next five years.
·
Tight state and federal budgets in the U.S. mean
that governments are outsourcing more prison capacity to the private sector.
·
Government prisons are already over crowded. But
it may get worse since the children of baby boomers, the so-called echo
boom, are about to enter the 18- to 24-year old age group. Those are the
years when people commit the most crime.
The three big private prison companies -- Corrections Corporation
of America (CXW),
The Geo Group (GGI)
and Cornell Companies (CRN)
– are one way to play this theme.
But not surprisingly, given the
potential growth in demand for private corrections services, insiders at two
small corrections companies have been buying shares in their companies,
suggesting they are ways to play this trend, too.
Avalon Correctional Services
(CITY)
Let’s start with Avalon
Correctional Services. It looks a bit more interesting – and potentially
more risky – for two reasons. First, four of its five board members recently
resigned. Second, Avalon says it is thinking about de-listing from NASDAQ
because of the heavy burden of complying with the Sarbanes Oxley Act for a
small company like this.
That’s enough to make anyone think
twice about buying shares here. But a couple of factors suggest it may not
be a bad idea. First, the company says the board members resigned innocuous
reasons, and they’ll be replaced soon. Next, at $2.20 the stock is already
off 20% from recent highs of $2.75. So a good bit of the de-listing threat
may already be priced in. Besides, despite what you might think, not all
stocks decline when companies announce de-listing. And even when they do,
they often recover in a month or two as long as underlying fundamentals are
ok. That seems to be the case with Avalon.
The company offers “community correctional facilities” that cost half of
what prisons cost. So cash-strapped governments should continue to look to
Avalon for help. Unlike prisons, Avalon facilities offer low-risk prisoners
treatment programs and a place to sleep while they spend their days working
or looking for jobs in the final months of their prison sentences. The
company plans to keep growing through acquisitions, and there are plenty of
“mom and pop” community corrections facilities out there to be bought.
An insider bought $59,000 worth of
Avalon shares for $2.04 last September, according to Thomson Financial. And
chief executive Donald Smith nearly doubled his personal holdings when he
took on 500,000 shares in December as part of a financing deal.
Correctional Services (CSCQ)
Unlike Avalon, Correctional
Services is trading slightly higher so far this year. But it’s the cheaper
of the two. It has a price to sales ratio of .22, compared to .4 for Avalon.
At around $2.90 per share, Correctional Services trades below where insiders
saw value and picked up shares north of $3 last May. Another insider bought
a small amount for $2.46 last September.
First the bad news. Correctional
Services has a $37.5 million judgement against it (on appeal) stemming from
the death of a trainee at one of its correctional centers. There’s also a
lawsuit filed by a male prisoner who says he was sexually abused by a female
guard. The company claims insurance will cover any eventual costs from these
and other suits.
Now the good news. Last year,
Correctional Services picked up a fairly big ICE contract to manage a Texas
prison that will be funded and built by local government. Contracts of some
sort will likely keep coming, even though this company is so small. “The
robust demand environment is good for all players,” says one Wall Street
analyst who covers the sector. “State and federal entities will very rarely
award all the contracts to one or two providers.”
Disclaimer
At the time of publication, Michael Brush
did not own or control shares in any of the companies listed in this column.
Mr. Brush is an independent correspondent for this web site.
For more on Insiders Corner disclosure, see About Insiders Corner:
http://www.investorideas.com/insiderscorner/. InvestorIdeas.com
Disclaimer:
www.InvestorIdeas.com/About/Disclaimer.asp. InvestorIdeas is not
affiliated or compensated by the companies mentioned in this article.
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