Is it a “sin” to profit from prisons?

Sin stocks.

It’s not the most flattering term, but that’s what Wall Street calls companies that make money from “morally questionable” activities. Or at least activities some might consider questionable.

Take casinos, like the ones landlord VICI Properties (VICI) rents to – a business that, in full disclosure, I’ve recommended more than once – gun manufacturer Smith & Wesson (SWBI), and cigarette seller Philip Morris (PM).

Some investors are fine investing in them. Some are not. Oftentimes, it comes down to core beliefs and the angles we approach those beliefs from.

For instance, I enjoy gambling when I go to Vegas for the ICSC, familiarly known as “the Super Bowl of retail real estate.” And I know other people who have genuine fun taking their own turns at the slot machines, craps table, or blackjack.

So while I fully understand it can be a vice, I see it first and foremost as entertainment. Just like McDonald’s (MCD) – another company I’ve recommended – has some tasty offerings… but eating them every day isn’t advised.

Admittedly, none of that justification applies to prison operators like CoreCivic (CXW) and The GEO Group (GEO). There’s nothing “fun” or “tasty” about incarceration.

Even so – with all due respect to those politicians who want to abolish prisons – I still say we need such facilities to house individuals who make society less safe.

For those who disagree, don’t worry. The rest of this week’s articles should be prison-free.

And for those onboard with my “sin stock” assessment? Well, there’s still one more ethical hurdle to consider…

Immigration.

Both CoreCivic and GEO go beyond owning and/or operating traditional state and federal prison populations. They’re also involved in immigration and customs enforcement (ICE) detainment facilities.

So if you’re fine taking on that much political controversy…

Then welcome to the world of prison profits. Here’s what you need to know.

Some of you might not know this, but both CoreCivic and GEO used to be real estate investment trusts (REITs). That worked just fine for them until the Obama era, when they started coming under social and political pressure.

Financing became more problematic as well, since banks no longer wanted to associate with such pariahs. And since financing is so very important for REITs – which are legally obligated to give away at least 90% of their annual taxable profits to shareholders via dividends – that made CoreCivic and GEO rethink the business structure altogether.

Ultimately, they both made the switch in 2021, converting to C-corporations instead. And that’s been working out well for CoreCivic so far.

Very, very well.

Shares have rallied about 400% since 2020. The company has been able to repair its balance sheet and buy back stock. And it’s reactivated facilities it couldn’t keep open before.

Today, more than 90% of its revenue comes from its CoreCivic Safety unit. This provides government agencies with correctional and detention-specific buildings – including ICE.

In fact, illegal immigration-focused operations make up this division’s primary growth catalyst.

Q1-26 revenue, for instance, rose 26% to $614.7 million. Adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) climbed 36% to $110.1 million. And adjusted earnings per share (EPS) jumped from $0.23 to $0.40.

Meanwhile, CoreCivic’s combined safety and community occupancy – which includes re-entry programs and vocational training – improved 260 basis points to 79.6%. But perhaps even more importantly was the recent boost of confidence it got in its real estate.

The company sold two detention facilities – its California City and Otay Mesa locations – for $1.5 billion last quarter, which generated net proceeds of about $1.1 billion.

Thanks in part to that influx of cash, the company can focus further on debt repayment. So I wouldn’t be surprised to see pro forma net debt drop closer to $245 million in the foreseeable future.

With an equity value near $3.2 billion, that would imply an enterprise value (EV) of just under $3.45 billion. And when you partner that with $454 million of expected EBITDA this year, you get an EV/EBITDA of about 7.6x.

That’s not expensive. And, again, ICE demand under President Trump is booming.

At the same time, its stock has already run up 400%, and that does make me nervous. As such, I’m calling this one a Hold for now.

Law and order investors can love the company. But they should wait for a wider margin of safety on the stock.

Competitor GEO Group (GEO) is in the same exact camp when it comes to demand – specifically when it comes to illegal immigration.

For the second quarter, GEO's revenue rose 15% to $732.1 million. Net income came in a whopping 63% higher at $47.5 million, which translates into $0.36 per share. And adjusted EBITDA increased to approximately $142 million.

Moreover, that kind of momentum could easily continue from here with ICE demand accelerating the way it is. This is especially true considering how GEO recently secured a set of contracts that cover approximately 6,000 beds.

That means $280 million more of annual revenue.

All told now, GEO’s active ICE capacity is up to 27,000 beds. And while occupancy was sitting at around 24,000 when we checked last, that particular population increased approximately 20% over the past six weeks.

So I think it will fill vacancies fairly quickly.

Plus, two more five-year contracts – one for a formerly shuttered facility in Hudson, Colorado; and the other one in Winton, North Carolina – should officially begin soon. Together, they could generate another $165 million in annual revenue once they’re stabilized early next year.

It’s also worth noting that ICE will reimburse GEO for the capital expenditures necessary to bring both properties back online. So the company is getting essentially free upgrades on top of contracted income.

It’s no wonder then that management feels confident enough to raise 2026 guidance… again. While it initially set its expected full-year adjusted EBITDA at $490 million to $510 million in February, it raised that to $525 million to $545 million in May.

And earlier this month, GEO bumped that calculation up yet again. This time, It was to $550 million to $560 million, with EPS of $1.27–$1.32.

Moreover, that guidance doesn’t count for earnings from its upcoming Hudson or Winton facilities. Or delayed contracts in Florida that should nonetheless be opened within the next few months.

Better still, management is using all of that incoming cash very well. GEO’s balance sheet is improving, the company is repurchasing shares at an intelligent clip, and its net leverage has officially fallen below 3x EBITDA.

From a valuation standpoint, we’re looking at an 8.6x price-to-EBITDA multiple. Once again, that’s hardly nosebleed territory, especially considering continuing demand.

Even so, I’d still prefer a better entry point.

Maybe it and CoreCivic are sin stocks, as accused. Maybe they’re businesses providing critical infrastructure to the government and services to society.

I’ll leave you to make up your mind about that one way or the other. But here’s one judgement I have no problem publishing in this investment-focused e-letter…

Prisons might be necessary. Prison stocks, however, are not – particularly when they’re trading at less-than-ideal price points.

Ultimately, I’m simply not willing to lock up my capital without a reasonable margin of safety.

Happy SWAN investing,

Brad Thomas
Editor, The Wide Moat Daily