What Does Michael Burry See in GEO Group?

Yesterday, we wrote about Michael Burry selling his entire portfolio except for one stock — GEO Group (NYSE:GEO) — the largest U.S. private prison operator. While the position is small, why GEO Group?

A little history: The U.S. has one of the highest incarceration rates and is also one of at least eleven countries to privatize prisons. In 2017, 15% of U.S. federal inmates were held in these private prisons.

Why privatize prisons?

The case for privatization: Cutting costs is one of the main arguments. Prison operators also say they provide the skills inmates need to keep employment upon release.

The case against privatization: Private prisons aren’t incentivized to reform inmates — instead, the opposite: keeping inmates in. In some cases, private prisons reduce costs while still taking in large payments.

The bipartisan divide on private prisons between the Republicans (in favor of private prisons) and Democrats (against) only grew in recent years:

• 2016: Trump ended Obama’s ban on the Justice Department’s private prison use — sending prison stocks soaring.
• 2021: Biden ordered the attorney general not to renew contracts with private prisons — sending prison stocks cratering.

Prison operators face an uphill battle

GEO Group (NYSE:GEO) and CoreCivic (NYSE:CXW) are two of the largest U.S. private prison operators — with two big issues:

• Debt-filled: These prison operators are saddled with enormous debt loads — both have stopped dividend payments in recent years.
• Cash-strapped: Big banks stopped lending to prison operators — forcing them to go to smaller banks at higher interest rates.

Even with Trump in office, prison stocks had steadily declined since 2017 — losing 60-80% of their value on the fear of legislation. Despite the decline and Biden’s ban, sales of private prisons have mainly remained stable.

U.S. agencies made up over half of both companies’ sales, and Biden’s ban doesn’t impact all private prison contracts. These contracts can also run as long as ten years, and it’s possible the next election will arrive and many of these contracts won’t even expire yet.

Investors: Politics moves prison stocks

Prison stocks have become heavily tied to the fate of election outcomes: The day Trump won in 2016, $CXW and $GEO jumped 41% and 18%, respectively.

With the next presidential elections not for another two years, it’s difficult to see what prison stocks have going for them — and even harder to explain why Burry kept GEO Group.