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Bill Ackman & Barron's like Prison



October 23, 2009 – Comments (3) | RELATED TICKERS: CXW , O

A week or two after Barron's wrote a large, bullish article on publicly traded prison operators, the famous investor Bill Ackman made Corrections Corporation of America (CXW) the focus of his presentation of the recent Value Investing Congress. 

According to Ackman, America's prison system is severely overcrowded.

author's note The Barron's piece contained a statistic that one in ten Americans is in prison...what's up with that?  Shape up people.  I wonder what percentage of that is because of drugs...specifically marijuana.  Despite my taste for the fire water, I've never tried the whacky tobaccee myself but when this many people are in jail for something that is relatively harmless it may be time to reconsider the laws.  Yet again, I digress.

He stated that California's penal system is currently running at a staggering 170% capacity.  Add to this overcrowdedness the fact that it is cheaper and faster for anyone outside of the government to do absolutely anything, including build a new prison and it makes a solid case for owning private prison operators.  He also likes the fact that the company has no debt maturing until 2012 and that it generates enough cash flow to easily cover it, as well as the fact that its board of directors currently holds a solid 5% of the company's stock.  Recently trading at the $25-$26 level, Ackman believes that CXW's stock is worth more like $40-$54 per share based on the good old sum-of-the-parts valuation.

Not surprisingly, Ackman's speech had a couple of really funny lines, such as 

[prisons are] "like a hotel where you lock in the guests, and if they try to escape you shoot them."


"It's also a hedge against your hedge-fund business, because as the SEC ramps up ...,"

Ackman is using his long position in CXW coupled with its short position in Realty Income (O).  I see his logic for investing in CXW, but the company definitely is not cheap enough for my value-oriented taste...despite its discount for more recent valuations.  Plus it doesn't pay a dividend.  That pretty much axes it from my list of potential investments.  I also worry about the massive deficits that some state governments are running and their ability to increase their business with the company.  What's to day that states just don't start letting prisoners out earlier rather than outsourcing their prisoner care to private companies.


3 Comments – Post Your Own

#1) On October 23, 2009 at 3:55 PM, Rebkong1 (< 20) wrote:

save a few spots for the guys in washington!!

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#2) On October 23, 2009 at 4:07 PM, Tastylunch (28.52) wrote:

high unemployment typically yields higher crime too.

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#3) On October 29, 2009 at 2:03 PM, yanivh (< 20) wrote:

It's 1 in a 100, not 1 in 10. Still highest rate in the world.

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