U.S. private prison operator shares seen rising, expanding election rally

By

Sinead Carew

Feb 21 (

Reuters

) - Shares in U.S. private prison operators

CoreCivic Inc

and

Geo Group

, already buoyed by hopes they would profit from a Republican administration, may rise further on immigration curbs and narrow a valuation gap with REIT peers. Promises by President Donald Trump's administration to clamp down on illegal immigration and the tougher-on-crime reputation of newly appointed U.S. Attorney General

Jeff Sessions

have boosted shares of the companies, the only publicly traded private prison operators in the country. Investors have bought in partly on relief that the government would be less likely than an administration led by Democrat Hillary

Clinton

to reduce its dependence on private prisons and partly on expectations that a tougher stance on illegal immigration could boost numbers at privately-run facilities. The Trump administration plans to consider almost all illegal immigrants subject to deportation, according to official guidelines released on Tuesday. The U.S. Immigration and

Customs Enforcement

's detention centers are all outsourced to private operators. "The decline in the (prison) population has been decelerating," said

Michael Kodesch

, analyst at

Canaccord Genuity

. "Some investors are betting not only does the population decline continue to slow, it might even reverse.” CoreCivic shares are up 138 percent since the Nov. 8 election, and shares of Geo, which reports earnings on Wednesday, are up 89 percent. Eric

Marshall

, portfolio manager at

Hodges Capital Management

in

Dallas

, said while the "easy money" has already been made in private prisons, the stocks could still rise another 10-20 percent in the next year. Marshall's fund holds shares in both CoreCivic and Geo, but cut its "overweight" positions from the previous quarter. He expects contracts that were put on hold ahead of the election to come up for grabs again soon, and sees federal and state government, which run 90 percent of U.S. prison capacity, outsourcing at least some more business to private companies. “Right now it’s probably a better 5-to-10-year business proposition to own a prison than a shopping mall. They’re not going to be affected by Amazon.com,” said Marshall. Some are less bullish.

Stephen Massocca

, chief investment officer at

Wedbush Equity Management LLC

in

San Francisco

, bought GEO and CoreCivic in September and October and sold a few months later, as "they're not the screaming buy they were." Many investors avoid the prison real estate investor trusts (REITs) due to the controversial and unique nature of the business. Geo shares trade at 15.4 times 2017 estimates from funds from operations per share compared with CoreCivic's forward multiple of 15 and the broader REIT sector's multiple of 16.8, according to Kodesch. Yet Kodesch says the stocks should be "at a small discount to the general REIT sector if not in line," and sees 16.3 as a fairer multiple. (Reporting by Sinead Carew; Editing by

Megan Davies

and

Leslie Adler

)