Quicksplained: Why are prison stocks surging after Trump’s victory?

In the wake of Donald Trump’s 2024 presidential election victory, stocks associated with the private prison industry, particularly those of GEO Group and CoreCivic, have skyrocketed.

The recent election result has brought significant attention to these companies due to anticipated policy changes likely to bolster the demand for private detention and correctional services, a dramatic shift from the stance of the Biden administration.

The promise of heightened immigration enforcement and tougher crime policies are at the heart of investors’ expectations, leading to notable stock rallies for companies heavily invested in the private prison and detention industry.

We take a quick look at what that entails:

The numbers:

• GEO Group and CoreCivic shares rose by 42 per cent and 29 per cent respectively on Wednesday, fuelled by the anticipation that Trump’s immigration policies would increase the need for private detention centers.

• GEO Group, trading at $16.27 on Election Day in 2016, had seen its price soar to $26.81 by his first inauguration in 2017, before falling to $9.79 on the day of the 2020 election and further to $9.01 on US President Joe Biden’s 2021 inauguration.

• CoreCivic mirrored this trend, with its stock climbing from $14.33 on Election Day 2016 to $28.32 by the 2017 inauguration, then sliding to $7.64 by the 2020 election and $7.26 by Biden’s inauguration.

The reason:

• Investors view Trump’s election as a signal of likely deregulation and renewed focus on crime and immigration policies. During Trump’s last term, these stocks initially flourished before declining sharply, reflecting a volatile four-year period that some investors believe might be repeated.

• Trump’s approach to immigration is expected to mark a reversal from the Biden administration’s policies, which allowed asylum-seekers to work legally while awaiting trial. This shift has been especially lucrative for GEO Group and CoreCivic, as these companies own and operate numerous correctional, detention, and reentry centers nationwide.

The revenue

• While GEO Group and CoreCivic shares are experiencing a spike, investors are aware of the cyclical nature of these stocks, especially following Trump’s first term. For instance, CoreCivic is expected to report third-quarter revenue of $469.8 million, slightly down from $483.7 million in the same quarter last year, according to Benzinga Pro data.

• Meanwhile, GEO Group is anticipated to post a revenue increase, with analysts projecting $613.3 million for the third quarter, up from $602.8 million in the prior year’s quarter. GEO Group has exceeded analyst estimates in eight of the last nine quarters, whereas CoreCivic has outperformed in four consecutive quarters and in six out of the last eight.

The caution & drawback

• Despite strong revenue performance, analysts have suggested that these stocks may be experiencing a temporary peak, with one analyst advising investors to consider taking profits now or selling around Trump’s inauguration in January.

• While prison stocks are thriving on Trump’s election win, other sectors may face potential drawbacks. Trump’s promised tariffs, aimed at boosting US manufacturing, could increase costs on imports, negatively affecting businesses reliant on foreign-produced goods.

• Analysts caution that while some stocks may benefit from Trump’s deregulatory policies, other companies could experience setbacks if tariff plans materialise. This could temper the current gains in the broader market, though it remains uncertain how far these effects will extend into the stock landscape.

• Amid these developments, Aramark, a company providing food, training, and employment services in correctional facilities, is another company worth noting. Unlike GEO Group and CoreCivic, Aramark’s stock has shown resilience, maintaining higher values than during Trump’s previous term.

Also Read | How will Donald Trump’s comeback impact India’s economy and stock markets?

With inputs from agencies