Canaccord On Private Prisons: 'Headline Risk' Can Affect Performance, But Is Unwarranted

The private prison sector offers a unique combination of defensive fundamentals and attractive growth potential, Canaccord Genuity’s Ryan Meliker said in a report. He provided details of two stocks in particular.

Stocks in this sector had earlier been under pressure on account of concerns surrounding the upcoming election, which appear to have waned in recent months. Analyst Ryan Meliker mentioned that the stocks continue to suffer due to fears surrounding the impact of immigration and sentencing reform on operating performance.

“However, it is our view that while headline risk is a concern from a stock performance perspective, these are unwarranted concerns from an operating perspective,” Meliker wrote.

Performance In California

In 2Q16, The GEO Group Inc (NYSE: GEO) reported an additional 161 prisoners, taking the total up 7.9 percent to 2,211 prisoners. Over the same period, Corrections Corp Of America (NYSE: CXW) reported a 3.2 percent decline in total California population, which includes an out-of-state population decline of 145 prisoners, or 2.9 percent, to 4,875 prisoners.

Related Link: Canaccord Thinks Private Prison Equities Could Break Out

Recent Stock Performance

Geo’s stock has gained 0.5 percent over the past two weeks, while Corrections Corp’s shares have lost 5.7 percent. In 2Q16, Geo’s stock declined 1.4 percent, while Corrections Corp’s shares gained 9.3 percent.

“We believe the sector's near-term sentiment swings tied to election rhetoric could be a material driver of the stocks at present…Currently, both companies are trading at an even wider discount to the REIT sector than the historical averages,” the analyst commented.

Meliker maintained a Buy rating on Geo, with a price target of $37, and a Hold rating on Corrections Corp, with a price target of $34. He added that Geo had a higher dividend yield [7.7 percent, versus Corrections Corp’s 6.7 percent] and a diversified business model.

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