The US Department of Justice will stop using for-profit prisons for federal inmates, as they have proved unsafe and inefficient. The Washington Post reported today (Aug. 18) that the DOJ instructed prison officials to either decline to renew contracts with private prison companies, or limit their scope.
The contracts for the 13 federal prisons run by private companies will expire within the next five years. As of December 2015, these facilities housed more than 20,000 inmates, or about 12% of the total population overseen by the Federal Bureau of Prisons. This number has declined in recent years as criminal justice reform efforts have gained speed.
But investors didn’t seem to see such an abrupt policy change coming. Shares in two of the largest, listed private-prison operators, Corrections Corporation of America (CCA) and The GEO Group, promptly lost almost half their value on the news:
Two weeks ago, CCA reported a fall in second-quarter profit, but upped its guidance for earnings for the full year. GEO was similarly upbeat, with chief executive George Zoley saying he was “very pleased” with the “outlook for the balance of the year.” Two of the three brokers that provide stock ratings on GEO to FactSet put “buy” ratings on the company this month.
It’s important to note that the Department of Justice’s change of heart doesn’t necessarily spell the demise of these companies. CCA, for instance, operates 34 state prisons that do not fall under the policy change.