Prison Stocks: What Happens When Marijuana Is Legalized?

Many prisons are private institutions that largely rely on government funding and crime to stay profitable. Its unusual source of sustenance makes it arguably one of the more distasteful industries on the market, but that hardly makes prison stocks a poor investment.

When the government first outsourced part of their incarceration system, businesses saw opportunity. Far from a utopian society, America will always have some level of crime to deal with. And for prisons, the higher the crime rate and number of imprisoned citizens, the more money there is to be made. As Lawrence Meyers, president of PDL Capital, puts it, prisons are "the one business always guaranteed to have customers."

Meyers offers these numbers: "State prisons have a 96% occupancy rate, while federal prisons are at almost 140% of capacity. And the prison population [is] growing at 5% annually. The market potential also remains huge, with only 8% of prisons privatized so far."

According to, Corrections Corporation of America (CXW) recently offered 48 states the opportunity to sell their penitentiaries and "manage convicted criminals at a cost-savings." The only condition was that the states must guarantee that there are enough prisoners for CCA to realize a profit.

Specifically, CCA wants a "20-year contract and assurances that the state will keep the prisons at least 90% full." Contracts are under consideration and gaining favorable interest in some areas.

Prisoner supply -- Petty crime -- Marijuana laws
Critics are a little surprised at the government for considering contracts that say they will supply a minimum number of prisoners. The crime rate is, after all, on the decline. The contracts may make judges feel obliged to dole out longer sentences, or seek out more petty criminals just to fill cells.

This is especially interesting in the case of marijuana, which is on an arguably slow but steady track to becoming legalized. But those charged for marijuana possession are no small contributors to the prisoner pool. The FBI reported in September 2011 that 853,000 people were arrested for marijuana-related violations in 2010. Of the total, 750,000 were for simple possession, 103,000 were arrested for the sale or manufacture of marijuana.

Regardless of where one might stand on the issue of marijuana legalization, it reasons that contracts between prisons and states may not foster a fair consideration of the issue in the courts.

Marijuana use is also believed to be on the rise among teens and young adults. If the marijuana laws find themselves overturned, the justice system will find itself in a difficult position to fill nearly one million cells. Where will they come from?

Business section: Investing ideas
Interested in conducting your own research into the private prison industry? To help you out, here is a list of the two largest companies in the industry. Where do you think these stocks are heading? (Click here to access free, interactive tools to analyze these ideas.)

1. Corrections Corporation of America (NYS: CXW) : Operates privatized correctional and detention facilities in the United States. The Company specializes in owning, operating, and managing prisons and other correctional facilities and providing inmate residential and prisoner transportation services for governmental agencies. Its facilities offer a range of rehabilitation and educational programs, including basic education, religious services, life skills and employment training, and substance abuse treatment

2. The GEO Group (NYS: GEO) : Provides government-outsourced services specializing in the management of correctional, detention, and mental health and residential treatment facilities in the United States, Australia, South Africa, and the United Kingdom. It operates a range of correctional and detention facilities, including maximum, medium and minimum security prisons, immigration detention centers, minimum security detention centers, mental health, residential treatment and community-based, reentry facilities. It offers counseling, education and/or treatment to inmates with alcohol and drug abuse problems at most of the domestic facilities, which it manages. It also provides secure transportation services for offender and detainee populations as contracted

Interactive Chart: Press Play to compare changes in analyst ratings over the last two years for the stocks mentioned above. Analyst ratings sourced from Zacks Investment Research.

Kapitall's Rebecca Lipman does not own any of the shares mentioned above. Data sourced from Finviz.

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