Pubdate: Tue, 18 Jan 2005
Source: Dallas Morning News (TX)
Copyright: 2005 The Dallas Morning News
Contact:  http://www.dallasnews.com/
Details: http://www.mapinc.org/media/117
Author: Bill Deener, The Dallas Morning News
Bookmark: http://www.mapinc.org/prison.htm (Incarceration)

PRISON COMPANIES' STOCKS SEE HEFTY GAINS

Surging Incarceration Rates Fuel Growth in Sector

Crime may not pay, but prisons sure do.

City, state and federal governments increasingly are turning to the private 
sector to run their jails and prisons. And investors who were perceptive 
enough to anticipate this growth have made a bundle in recent months.

Don Hodges, portfolio manager of the Dallas-based Hodges Fund, has been 
bullish on prison growth for quite some time. "There's just a lot of 
lawlessness in America," he said with a chuckle.

Investing in such a sector brings unique challenges, not the least of which 
is coming to grips with profiting from crime and incarceration. Three 
companies control the bulk of the private prison market, but Corrections 
Corporation of America, based in Nashville, Tenn., is by far the largest 
and garners most of the investor attention.

The other two main players are Geo Group Inc., based in Boca Raton, Fla., 
and Cornell Cos. of Houston. Corrections Corp.'s revenue has steadily 
increased from $268.9 million in the fourth quarter of 2003 to $292.5 
million in the third quarter of 2004. Its stock price jumped from about $34 
a share last summer to its current level of $42. Shares of Geo Group have 
climbed from about $18 a share to about $25 a share during the same period. 
And the stock price of Cornell has moved from about $12 to just above $15.

Privatization Trend

Mr. Hodges has been loading up on shares of Corrections Corp. for more than 
a year. His fund now owns 30,000 shares of CCA and 65,000 shares of Geo Group.

"I started watching these stocks when they first went public several years 
ago," Mr. Hodges said. "Most of the people I talk to say the private sector 
can manage prisons at least as good as the government." The fuel to drive 
these stocks higher is the growth in the U.S. prison population.

While crime is down in America by many measures, tougher sentencing 
guidelines have helped boost the number of inmates.

The prison population typically grows at about 2 percent to 3 percent 
annually. There are about 2 million people in federal, state and county 
custody, according to the U.S. Justice Department.

Currently, only about 5 percent of states' prison population is housed in 
private facilities, as is about 10 percent of the federal prison 
population. "The rate of privatization has been going up at an increasing 
rate," said Paul Doucette, spokesman for Cornell Corp. "Privatization is 
becoming an acceptable way for the government to get quality service at a 
competitive price." Typically a private prison can reduce costs by about 10 
percent to 15 percent, he said, because "competition drives efficiency."

Rising Population

Mr. Doucette cited statistics that show the prison population continuing to 
grow. As in any industry, prison companies study such data in order to plan 
their business.

First, he said, the prison population is expected to continue increasing 
because of the so-called "echo" generation. These are the grandchildren of 
the Baby Boomers, who are reaching the ages of 16 to 24.

"There is a bubble of kids who are right on the verge of reaching the age 
when statistically some of them are going to commit crimes," Mr. Doucette 
said.

Also, increased security along U.S. borders has increased the number of 
arrests of illegal immigrants, he said. The Federal Bureau of Prisons has 
said that in five years it will be faced with a 36,000-bed shortage.

Long-Haul Potential

Investors should be cautious of jumping into a sector like this that has 
already experienced such a big run-up.

However, Mr. Hodges, whose fund is typically ranked among the nation's best 
performers, said he believes these stocks still have room to run. And he's 
not selling his shares.

"I don't think they are overpriced. If investors hold them for the long 
haul, there is still some potential," he said.
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