Correction Corp. Of America's Friday Bounce Provides A Good Short Opportunity

Correction Corp. Of America's Friday Bounce Provides A Good Short Opportunity

Summary

The brief bounce that shares of Corrections Corporation of America (NYSE:CXW) experienced Friday presents an excellent opportunity for investors to get short shares of the private jail business group.

Fears over the fate of CXW’s government contracts will continue to weigh on shares of the company as the Presidential Election draws closer, which could make a short position in CXW attractive well into November.

Analysis

Shares of Corrections Corporation of America came up for air on Friday after getting slammed in Thursday’s session. Their precipitous decline on Thursday came after a noontime announcement that the U.S. Department of Justice plans to phase out its use of private prisons. What might have been just another announcement about a longer term policy change had CXW walking the “Green Mile” in afternoon trading as a weary public and volatile political environment helped the story explode.

We believe that the downward pressure will only continue, despite the small relief that shares of these companies experienced on Friday. After Friday’s session, many media outlets were quick to point out that the implications of the announcement might not be as dire as first thought. The initial announcement from the DoJ would mean that current contracts – some of which extend out five years- would not be immediately terminated but simply not renewed at their termination. The specific facilities impacted by the decision comprise only a fractional amount of both companies’ revenue.

The current political climate and overwhelming public support of the DoJ announcement, however, could quickly lead to broader measures. As Hillary Clinton continues to make gains in the polls, and news of police brutality continues to draw attention and criticism about private prisons, other government agencies could quickly follow suit as could public sentiment.

The DoJ’s announcement could be just the first domino in the downfall of CSX and GEO if other government agencies such as the U.S. Marshals, the U.S. Immigration and Customs Enforcement, and governments at the state and local level follow suit. We expect to be hearing announcements from these entities in the weeks ahead.

The public reaction and awareness of the DoJ announcement should not be underestimated. News that contracts would not be renewed quickly gained significant attention in the mainstream media and on social media sites like Twitter and Facebook (NASDAQ:FB). The use of private prisons has come under increased scrutiny in recent years, and an increasingly wary public – tired of seeing police and state brutality on the news every night – will undoubtedly continue to keep the recent DOJ news front and center. The public is on high alert, a feeling only amplified by the divisive and polarized political battle that’s raging front and center.

Conclusion and Action Step

The type of momentum that this kind of widespread disdain and social awareness creates will only continue to put pressure on shares CXW in the short and medium term as the election approaches.

Whether the implementation of the DOJ’s plan to phase out these private prisons takes effect today or five years from now, the anger about the system-as-is is palatable in the present moment.

American angst and fear is at an all-time high and firms like CXW make easy targets.

Today may be the time to get short shares of CXW.

Disclosure: I am/we are short CXW.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Unique Finance). I have no business relationship with any company whose stock is mentioned in this article.