by Travis Johnson, Stock Gumshoe | August 9, 2010 1:25 pm
Just when I thought my Monday morning might be a big gloomy, with the clouds rolling in for a day of humid thunderstorms, here comes a ray of sunshine to brighten my outlook: The Foolies have a new ad out!
This one’s for their flagship Stock Advisor newsletter, the one that pits bros Tom and Dave against each other with monthly stock picks from each — a nice sibling rivalry upgrade from my experience, which was mostly of noogies and wedgies both given and received (I like to think I emerged victorious, even if my baby brother could easily beat me today to any benchmark you choose).
But anyway, they’ve got a new pick to tease for us — and a fresh crop of copywriting hype to fuel the thinkolator, and to bring the greed-o-meter up to a solid 11 on the I-Wanna scale. (I wanna buy this and get rich, I wanna buy this and get rich, I wanna buy this and get rich, repeat). The newsletter has generally had pretty solid long term performance, according to Hulbert (they’ve beaten the market over the periods he measures, one and five years), though the picks they tease in their promos tend to be used so many times over many years that it’s hard to peg their performance — should we credit them for the teaser ads they ran promoting Whole Foods stock three years ago when it was near $50, or the almost identical ad they ran a couple years later when it was near $10? The same could probably be said about other picks that they’ve liked for a long time, like Activision Blizzard (which I personally own), though it’s also only fair to note that they have teased some barnburners in recent years, with Netflix probably at the top of that list.
So this time around, as far as I can tell, we’ve got a fresh one for the teaser marketing machine — a stock I don’t remember ever seeing them write about in their ads before. Whether that’s good or bad we’ll find out in the decades to come, I suppose (the Foolies are, as ever, long-term hold investors for the most part) … but lets at least figure out who the stock is for you, eh?
“Look for America’s elections on November 2, 2010, to be the specific catalyst for a share price “breakout” for one temporarily mispriced stock…
“In fact, a high-profile hedge fund manager was recently overheard telling a roomful of power players in a meeting room next to Times Square this $20 stock will soon trade in the $40-$54 range…”
So … that’s actually probably enough to tell you who this is (I’ll give you a hint, I suspect that the Foolies are talking about the Value Investing Conference in NY last Fall) … but that wouldn’t be any fun, we’ve barely whet our appetites for hype. Perhaps a little bit more to confirm our suspicions?
Here’s some more info about who’s buying the stock now:
“It’s as predictable as day following night. It’s a special opportunity that’s been building and is just about to reach critical mass. Meaning there’s some real money to be made here!
“In fact, a handful of elite investors are beginning to place their bets…
“George Soros (the only man in history to make $1 billion on a single trade) just got in… so did the fund managers at BlackRock and Vanguard”
Day following night? Man, I always thought it was the other way around. So … some specifics about the company and that 85 days business, please?
“With unemployment around the country remaining stubbornly high, states won’t get any relief from tax receipts anytime soon… so clearly politicians have some difficult choices to make.
“And with Election Day 2010 coming up, I assure you… this story will become bigger and louder by the day.
“It all adds up to a unique chance for you to turn your state and local governments’ budget deficit debacle into a Foolish pile of cash!
“Here’s what to look for… over the next 85 days, while jaw-wagging politicians are counting their votes and leaning into their podiums…
“The smart ones will understand they need to deal with their fiscal disasters head-on.
“And the really smart ones will arrive at the following conclusion sooner or later: promising to slash school budgets and lay off teachers, firemen, and police will not get them elected.
“Not when they don’t have to!
“You see, the crackerjack politicos (and eventual winners) are right now studying their state budgets from the top down, and near the top… they’re seeing an opportunity to 1) slash annual spending… 2) solve a nagging problem… and 3) even create jobs in some areas. Take a look…
“In a ‘State of the State’ speech a few months ago, California’s Gov. Schwarzenegger proclaimed his intention to privatize the prisons in the state and sharply cut into the $8 billion-plus a year the state spends on them… and get this, such a move would actually improve the safety and security of the prison system.
“That’s right — privately run prisons. Allowing federal, state, and local governments to spend less and get better results…”
OK … so, private prisons. There are a few of these companies, and they’ve had some tumultuous times as public investments over the past decade or so. But let’s see if we can make sure we know which one the Foolies are recommending:
“But there’s a catch here — you have to be willing to grow richer while hardened criminals yelp and howl behind sturdy prison bars… and nanny state proponents (and beneficiaries) fume!
“Word is getting out. That much is clear! The director of government reform at the Reason Foundation, Leonard Gilroy, says institutional investors are becoming more and more interested in private prisons to complement their basket of stocks in large funds and pensions.
“Here’s the upshot in all this for you: We’ve identified the hands-down single best stock to get into your portfolio before November.
“It’s the same stock the ‘smart money’ players I mentioned a minute ago are quietly scooping up. It’s why we created a hot-off-the-press, limited-run report. Only 10,000 are available — and that’s to protect our Stock Advisor members who intend to keep acquiring this stock for the next few months.”
Wow … OK, so 10,000 reports … and it takes a $99 subscription to get that report. You don’t have to be a hedge fund manager to understand that math, that’s just a hair under $1 million. Even with a growing company’s overhead and a pretty hefty refund rate (and they are cheerful refunders, in my admittedly years-ago experience), that’s a nice haul.
“Even a lot of Wall Street pros view this as a ho-hum “business services” firm… when really it’s a real estate play with an extraordinary growth story wrapped around it. The real estate is what gives this investment a built-in value dimension. In fact, one prominent hedge fund manager recently went on record in front of the prestigious Value Investing Congress in New York City, calling this company…
“One of the best real estate businesses in the world…”
Well, I guess I didn’t have to bother guessing at that above, did I? Geez, they just come right out and spill those beans … I can at least tell you that the hedge fund dude they’re quoting is Bill Ackman.
And just to keep the suspense building, here’s a bit more that they share about the company’s financials and such:
“Total revenue for this company just jumped 5.5% from the previous year. It was able to generate earnings ahead of expectations, despite a historic recession…
“The company’s return on equity of 11% tops the industry average of 7%. The company’s net profit margin of 9% is well above the industry average of 1%.
“And shares of the stock have soared past the S&P 500 by more than 70% over the past year. As for the months and years ahead, and the growth potential of this unique investment, it’s ‘undeniable’ according to Tom Gardner…”
So NOW I can tell you that the company they’re alluding to and hinting at and teasing is … Corrections Corporation of America (CXW)
If you’ve ever heard of publicly traded prison companies, this is probably the one you’ve heard of — it’s pretty big at about a $2 billion market cap, at least compared to its competitors, which include Cornell Companies (CRN) and the Geo Group (GEO), both of which have slightly broader niches in outsourced work for governments (including rehabilitative services, mental health, and, in the case of Geo, a global footprint) but smaller businesses. There’s also Avalon Correctional Services (CITY), which was in a really ugly dispute with a shareholder for as long as I can remember, I’m not even sure they trade anymore or what their business status might be.
But yes, Corrections Corp of America is the granddaddy of the for-profit prison business — and yes, the shares are right around $20 and Ackman thinks they’ll get back to above $40 (a level it last attained over ten years ago … though it did get close to $35 back in 2007 … and the company has changed character a few times along the way, splitting into an operator and a REIT and then re-combining when that overleveraged deal didn’t work out).
And the share price did bump up a bit last fall when Ackman gave his presentation at the Value Investing Conference (it’s a good presentation, one reason I’m planning to attend the conference this year), but it’s back down now to near where it was when he discussed it.
I could summarize some of the points for you about the real estate value, their high margin prison ownership business, and the tremendous growth we should continue to see in prison demand in this country (and the lack of public funding to build them, and the relative efficiency of private versus public prisons), but really, I’m assuming the Foolies would give more or less the same spiel as Ackman did, and the price is comparable, so you might just view his presentation and update it yourself with your assessment of the company’s last few quarters (the folks at Market Folly apparently shared their copy at SeekingAlpha last year, and Ackman is followed very closely, so it ain’t exactly a secret).
And yes, as of the end of the first quarter Ackman’s Pershing Square still had roughly the same size holding in CXW, a bit under 10% ownership (the fund is by far the biggest outside investor — insiders own a bit less then 5%).
The only caveat I’d provide is that although yes, the business looks pretty good to me, too, there’s not necessarily a day-follows-night quarantee that they will continue to see high margin profits, or that the stock will go straight up. This is a business that has some competition (and high margins always breed competition), but it is really an oligopoly of just a few private firms who build and run prisons in the U.S., so probably fears of private competition shouldn’t scare you too much …
… but it’s also a business that has few customers and fairly high political sensitivity, and we’ve seen at least a couple cases, with state budgets faltering, of states pulling prisoners out of private facilities and/or cutting the fees they pay to private operators. We know that states and the feds would probably love to have all prisons operating at 100% capacity instead of 180% or whatever the worst of them are now, but we don’t know if or when they’ll come up with the money to make it happen, or the political will to, in effect, fire government employees and bring in private contractors, even if it does improve facilities, reduce deaths and escapes, and save money as the private operators all attest.
And of course, if we move to further decriminalize drugs, lots of these buildings would stand empty. Not likely, I expect, but it does often seem like there should be a backlash to the number of nonviolent offenders who are locked up — I say that not to spur a debate about the drug war, but to remind you that prisons, and the things we imprison people for, are subject to more potential change than we might currently assume.
Personally, the argument that this is a great cash-producing real estate play is pretty compelling to me (cash for the company, not for you — they don’t currently pay a dividend). The valuation certainly looks lovely on a real estate value and free cash flow basis (though a lot of this real estate is not exactly easy to convert into shopping malls and apartments if you need to “realize value” or “monetize assets”) … and I’d lean toward Ackman and the Fools being right in the long run about private prisons and the likelihood that they’ll be able to continue growing and reaching profitable capacity for new facilities, but I’d stop short of saying it’s as solid a lead-pipe cinch as night following day. Or vice versa.
And of course, Ackman isn’t prescient or perfect (you already know that the same is true of the Motley Foolsters … and, I hope it goes without saying, of yours truly), and he also may not have the same time frame as you do — he was also short Realty Income (O), a favorite pick of income investors and a few income newsletters, last Fall, a short that seemed principally based on the fact that investors own this just for the growing monthly income without following the financials that closely, and that as soon as the reckoning comes and they have to cut the dividend those investors will rush for the exits. He might be right, and I have no idea whether or not he’s still short the stock, but the dividend has yet to be cut and the stock’s up about 30% from last Fall’s lows.
Full disclosure: as noted above, I currently own shares of Activision Blizzard. I have no direct interest in any other stocks mentioned, and will not trade in any stock written about for at least three days.
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