Because of their relatively stable revenues, companies that provide services to government agencies tend to be good investments in practically all market environments.
Some of the most attractive operate prison facilities and provide related services to law enforcement agencies. So, what are the best prison stocks to buy now?
The GEO Group
The GEO Group (NYSE:GEO) is a multinational prison and detention facility operator. The company owns or operates 102 facilities throughout the US, UK, South Africa and Australia.
In addition to the stability broadly associated with prison stocks, The GEO Group also stands out as a potentially strong value buy. GEO shares trade at 8.5 times forward earnings and just 2.96 times cash flow. The price-to-earnings-growth ratio, moreover, is an encouragingly low 0.85.
Part of the reason for the market’s apparent failure to price GEO shares fairly may be the lingering result of a major restructuring the company went through in 2021.
Prior to that time, GEO had been organized as a REIT. As such, investors viewed the stock largely as an income opportunity.
Although investors soured on the news that GEO would no longer pay dividends, the move gave the company a significant opportunity to strengthen its financial position and invest in new growth initiatives.
Speaking of growth, The GEO Group has seen its earnings rise admirably over the past two years. Since restructuring at the end of 2021, annual earnings have risen from under $0.50 to the current trailing 12-month figure of $0.93 per share.
Earnings are projected to see considerable growth over the coming 12 months, with analysts expecting adjusted EPS of $1.21.
Thanks in part to this earnings growth, analysts forecast a median target price of $15 per share, roughly double the most recent price of $7.49.
A final positive factor in favor of GEO is the massive support the stock seems to have from institutional players, who currently own nearly 75 percent of the company; inflows have more than doubled outflows over the last 12 months.
The stock has also attracted the attention of noted investor Michael Burry. GEO shares make up 3.95 percent of Burry’s portfolio.
With a slightly smaller overall footprint than GEO, CoreCivic (NYSE:CXW) operates about 50 holding facilities and 30 residential reentry facilities. It also owns 15 properties that are leased out for government use.
Like The GEO Group, CoreCivic previously operated as a REIT but restructured as a traditional C-corp in 2021.
CoreCivic shows several signs of potential undervaluation, including trading at 7.5 times forward earnings and 5.8 times cash flow, closely mirroring the low price multiples the market has assigned to GEO.
CoreCivic is even more attractive than GEO in terms of its balance sheet, as the company has a debt-to-equity ratio of 0.74x compared to GEO’s 1.50x.
Despite its strengths and attractive value, CoreCivic’s thin profitability metrics may raise concerns for some investors. Its net margin of 6.5 percent is somewhat low, but its 4.3 percent return on equity is the real concern.
With such thin profit margins, management has little room to stumble operationally. Nevertheless, the stock’s low price relative to its earnings offers investors some degree of protection from this risk.
On the plus side, CoreCivic may have a decent runway for earnings growth. Following four quarters of losses in 2021, the company has returned to profitability. However, the current earnings are well below their pre-2021 levels due to ongoing attempts by the company to strengthen its balance sheet.
Trailing 12-month earnings are currently $1.02 per share, compared to an average of $1.50 or higher throughout much of the late 2010s. If CoreCivic can regain this level of earning potential, investors who buy at today’s prices may see substantial returns on their investments.
This potential for higher future earnings is strongly reflected in CoreCivic’s price forecasts. Analysts rate the stock highly, with a median 12-month price target of $15.
While not as spectacular as the potential 100 percent upside projected for GEO, this price target would still represent an increase of 44 percent from the most recent price.
UK-based prison operator Serco (LON:SRP) is a defense, government service and prison facilities company that operates in Europe, North America, the Middle East and Australia.
Serco is more diversified than the other companies listed so far. Prisons, including six operated by the company in the UK, are still important revenue drivers for Serco.
While Serco has its advantages, it should be noted that the stock trades at a bit more of a premium than either GEO or CoreCivic. Serco’s forward P/E ratio is 10.4, while its price-to-cash-flow ratio is 10.5.
Its price-to-earnings-growth ratio of over 3.0 is concerning, as this is a traditional sign of overvaluation relative to future growth.
Although Serco trades at a premium, several positive factors could make the stock worth taking a chance on. To begin with, the company maintains a very strong return on equity of 20.7 percent. Analysts also expect Serco’s earnings to grow over the next three fiscal years, likely putting upward pressure on the stock.
A final point in Serco’s favor is the fact that the company pays a modest semi-annual dividend. The current yield on Serco shares is 2.01 percent, offering investors at least a decent level of income. Assuming the company’s earnings continue to improve as expected, there’s a solid chance for further dividend growth.
While not a prison operator, ShotSpotter parent company SoundThinking (NASDAQ:SSTI) is a closely related law enforcement stock that could be an attractive buy for investors. The company’s main product is a gunshot detection system that alerts police to the location of potential firearm discharges.
SoundThinking is closing in on profitability, with adjusted earnings projected to rise to $0.03 per share over the forward 12-month period.
The company’s recent financial results have also been fairly impressive. In Q2, revenues rose more than 10 percent year-over-year, while GAAP losses narrowed from $3.0 million to $2.7 million.
During the quarter, seven new cities also began operating ShotSpotter systems. Gross margin remained strong at 57 percent of revenues, indicating the long-term potential for solid profitability at SoundThinking.
The major threat for investors looking at SoundThinking is that of public backlash against the use of ShotSpotter systems. These systems have been controversial since their inception, and many municipalities have seen efforts to reduce or eliminate their use.
The city of Chicago is a prominent example, with the push to end the city’s contract with SoundThinking having become an issue in the most recent mayoral election. Cancellation of contracts by major cities could stunt SoundThinking’s growth.
Prospective SoundThinking investors also have to contend with concerns over the stock’s premium valuation, which trades at a massive multiple to its projected near-term earnings.
This fact has not, however, deterred analysts from issuing highly bullish forecasts for the stock. The current median analyst price target for the stock is $33, a gain of over 70 percent from its most recent price.
For investors interested in the technology opportunities related to law enforcement, few companies are as interesting as Palantir Technologies (NYSE:PLTR), a data analytics firm that caters to military, law enforcement and commercial customers.
Its signature law enforcement product, a platform dubbed Gotham, is used to find patterns in massive data sets that can pinpoint crime hotspots and generate insights into criminal activity for police departments. Palantir is also heavily involved in providing data analysis services to military and intelligence agencies.
The primary growth catalyst for Palantir is its increasingly aggressive move into the AI market. This market, expected to reach $1 trillion in total global value, is a natural target for a company that has already leaned heavily into advanced data analytics.
Management has outlined its strategy in this market as a rapid effort to seize off market share before potential competitors can emerge.
Like many AI stocks, Palantir trades at a massive premium to its current earning potential. The company’s forward P/E ratio is over 200, though it should be noted that Palantir has only recently achieved positive earnings.
Over the coming five years, the company’s earnings are expected to grow at a compounded annual rate of over 65 percent. This rapid growth rate could justify the current premiums, especially if Palantir emerges as a dominant player in the AI space.
One of the other key points in favor of Palantir is its strong history of revenue growth. Since going public in 2019, the company has raised its quarterly revenues from $252 million to $533 million.
Paired with its expected move to much higher levels of profitability, ongoing revenue growth could continue to exert upward pressure on Palantir shares over the next several years.
The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.