There are three primary factors that should come into play whenever choosing a winning stock for a long-term investment.
The shares must be undervalued, they must possess a solid dividend yield, and there must be internal and external catalysts that will push shares higher.
I have identified a company that fits all of the above criteria that determine winning long-term investments. An over-reaction to the news has caused the share price to plunge deep into the value zone. Its dividend yield is currently over 10%, an astounding number for today’s economic climate.
However, what I like most about this company is that powerful external catalysts are expected to help send the share price to new heights.
The company is Corecivic Inc (CXW), formerly Correction Corporation of America. Let’s take a closer look.
Founded in 1983, CXW is a REIT specializing in owning and managing correctional facilities.
Boasting a market cap of over $2 billion, the company describes itself as a full-service corrections management provider, focused on the design, construction, expansion, and management of prisons, jails and detention facilities. It also provides residential reentry services, as well as inmate transportation via its subsidiary TransCor America.
It is the fifth-largest prison operator in the United States. Only the federal government and three states run larger correctional operations than CXW. The company houses nearly 70,000 inmates in over 70 facilities, the majority of which are company-owned and collectively have a total bed capacity of over 80,000.
CXW obtains its clients from all three federal corrections agencies (The Federal Bureau of Prisons, the U.S. Marshals Service, and Immigration and Customs Enforcement), many states, and local municipalities.
Since going public in 1994, the company has grown to manage over forty percent of all adult prisoners under a contract with the above sources in the United States.
The company employs over 13,000 professionals nationwide in security, academic and vocational education, health services, inmate programs, facility maintenance, human resources, management, and administration.
Disaster hit the shares on August 18 when the Deputy Attorney General of the United States, Sally Yates, published a memo calling for the reduction and ultimate end of private prisons.
Investors panicked on the news sending shares sharply lower to a 52-week low near $13.00. This represented a price decline of over 60%.
Next, a true double-whammy of bearishness emerged with the Department of Homeland Security announcing a study of the private prison system to be completed by November 30.
Together, these two events pushed shares into the deep value zone, creating a golden buying opportunity.
The private prison sector is aggressively fighting the Justice Department’s directive. There are multiple political and practical hurdles that make the elimination of private prisons very unlikely.
Also, it is critical to note that the Washington Post points out that the majority of those incarcerated in the United States are held in state prisons, rather than federal ones — and Yates’s memo does not apply to any of those, even the ones that are privately run. Nor does it apply to Immigration and Customs Enforcement and U.S. Marshals Service detainees, who are technically in the federal system but not under the purview of the Federal Bureau of Prisons.
But just for the sake of argument, let’s say that the Department of Justice is successful in phasing out private prisons for federal use. Remember, this represents 25% of CXW’s available federal beds or only 8% of the total. In total, 32% of CXW’s facilities are community correction centers that are not part of the possible phase out.
Also, even if the phase-out happens, the Department of Justice will still be contracting these facilities through 2017 and CXW has a well-diversified portfolio of property types.
Many investors remain unduly concerned with the Homeland Security report slated for released on November 30. Even if the report takes a similar stance as the Department of Justice, I firmly think that the worst is already baked in to the stock price…
CXW’s Dividend Yield Remains Strong
The next critical aspect of a potential long-term stock purchase is dividends. CXW is structured as REIT, meaning it is required to pass along 90% of earnings as dividends to the shareholders. Make no mistake, dividends may drop should the Department of Justice find success in their campaign. However, I still expect significant yields to continue from CXW long into the future.
President Trump Might Be A Boon For Prisons
Perhaps the most exciting of the three factors is the pending outside catalyst that should push the shares to all-time highs. We had already seen the power of this catalyst mid-week when shares rocketed from $14.00 to over $22.00 per share. This catalyst is our new President-elect Donald J. Trump.
Mr. Trump ran on a law and order platform with a vow to crack down on illegal activity. Obviously, this is a huge positive for the private prison industry. In fact, should Mr. Trump carry through with his campaign promises, the prison population may explode higher, creating massive upside for the shares. He may even nix the Department of Justice’s attempt at de-privatizing, as demand will outstrip supply very quickly.
Risks To Consider: Trump may not be able to get his campaign promises instituted, and the DOJ may succeed in the phase out. While both these things will slow the stock’s growth, I still believe the stock will thrive into the future.
Action To Take: Enter long near $20.00 per share with a $44.00 target price. Initial stops are suggested at $16.43 per share.
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