One of the least-known types of sin stocks are crime sin stocks. These are stocks that still profit from sin but not in the way you think. Crime sin stocks are mostly the publicly traded corporations that run prisons. In the US, three publicly traded companies do this job: Corrections Corporation of America (CXW), Avalon Correctional Services (CITY), and The GEO Group (GEO).
I’m a big fan of crime sin stocks and I think there is a lot of opportunity here for investors. But as part of your due diligence you need to consider the following factors, which could influence whether or not you buy these stocks:
THREAT #1: THE PUBLIC FINDS OUT
This threat is sort of tongue in cheek. But only sort of. Most people plod through life with the happy assumption that the government is in charge of criminals, and private prisons are the realm of science fiction. However, what might happen if Americans really did discover to their horror that “corporate fat cats were raking in taxpayer cash because of criminals”?
I don’t think we’d see these companies forced out of their work in the near future but we might see public pressure put on politicians to avoid having new privately-owned prisons built in THEIR jurisdictions. In some ways, this potential vilification might not only make this even more of a sin stock but it could have a detrimental effect on the price of the stock.
THREAT #2: GOVERNMENTS SQUEEZE TOO MUCH
One of the best aspects of this sin stock is that they are locked in. These crime sin stocks own a lot of the prisons they run, they manage it, and they’ve got everything worked out nicely. Frankly, that makes them “locked in” because it’s hard to see how the government might dislike one company (or the industry altogether) and decide to build prisons to replace the ones owned by these private companies.
However, that won’t stop the cash-strapped government from squeezing hard, perhaps negotiating to the point where it’s no longer as profitable for these companies to run these prisons.
THREAT #3: REHABILITATION ACTUALLY WORKS
Prisons are called correctional facilities and a bit push in the justice system is to rehabilitate criminals and help them find meaningful work in the world. To those criminals who turn their lives around and become contributing members of society — I applaud you. But the prison system is, sadly, more famous for its revolving doors that send “reformed” criminals out into the world and then take them back in again. (I’m not here to talk about whether this system works in theory. Gosh, that is a GIGANTIC topic. Rather, I’m sticking to the investing side of the conversation). Let’s say rehabilitation starts to work. Suddenly, criminals don’t return to the system and the need for more cells drops. Again, this is pretty theoretical but I’m trying to be thorough.
THREAT #4: LACK OF NEW INCOME STREAMS
Crime isn’t about to go away soon so these companies enjoy a constant inflow of income in the form of prisoners. But these companies are limited in how they can grow. As REITs (which two of the companies are in the process of switching to), they had to get rid of the some of the services they once offered (GEO had to drop their medical care line of business). But they’re trying to offer more services (GEO now offers secure transportation for criminals when they need to travel — such as to court appointments). I haven’t been able to discern what they can and cannot do but this should be a point of research for investors to look into further — these companies’ cash flows will grow with prisoners but may potentially be constrained beyond that.
THREAT #5: CRIME RATES DIMINISH
Hey, I wouldn’t complain if crime rates diminish. As someone who has been a magnet for robbery and assault (I’ve averaged 1 incident every 2 years of my life), I would be the first to cheer on scenarios where criminals stop being criminals. But as an investor, lower crime rates mean fewer people in prisons and that drives down revenues… and that, of course, would drive down the stock price.
Don’t just assume that criminals will stop being criminals. That’s not the only factor in crime rates. Consider also the impact of redefining what a crime is, what a criminal is, and what the penalties of crimes are. This is the more pressing reality for investors (than the possibility that criminals will stop committing crimes). We’re definitely seeing the redefinition of crime as a reality in America today. If you’ve been following the news for the past few months, you’ll know that some prisons (particularly those in California) have to let out thousands of inmates because of lack of room; you’ll also know that maximum penalties for certain types of crimes are being removed or decreased; and you’ll also know that, in New York, there’s a pilot project exploring the possibility of keeping some female criminals out of jail. It’s possible that these are trends that will continue to decrease crime rates — not necessarily by reducing crime but by reducing how crime is punished.
Another way that crime rates might diminish is if the economy improves. Economics is tied to crime rates (downturns lead to crime increases) so there may be an impact should the economy improve.
This fourth threat is probably the biggest because it is so multifaceted.
As you can see, there aren’t a lot of threats, and the risk of those threats coming true are low. But in every industry, and in every market, there are situations where investors are totally blindsided and responded with “I never knew that could even happen!” so it’s worth thinking about these possibilities and how they might impact your investment.