These Negative Stocks Aren't Positive Investments

Over all, there are now more people under "correctional supervision" in America -- more than six million -- than were in the Gulag Archipelago under Stalin at its height.
--
Adam Gopnik's "The Caging of America," published by The New Yorker

The traditional concept of a sin stock often brings to mind tobacco, booze, and gambling. Oh, please. Those industries are absolute child's play compared to some of the infinitely more negative corporate channels through which investors can try to make money these days.

Take the market for incarceration. It's difficult to conceive of a more negative way to turn a profit than imprisonment of human beings, and the mind reels at the endless possibilities for abuse, corruption, and a litany of perverse incentives.

The new state of sin
In the years following the financial crisis, more and more ethical investors should consider that some industries' perverse incentives may inflict more widespread damage than more traditional "vice" industries. I'd certainly argue that "too big to fail" banks Goldman Sachs (NYS: GS) and Bank of America (NYS: BAC) should be defined as new-school sin stocks.

The for-profit prison industry reveals a new low in the ways some corporations (and their investors) can make big profits, though. And let's not forget, when there's a profit motive involved, there also may be a whole heck of a lot of behind-the-scenes work going on to make sure more and more people are put behind bars in America.

The Bureau of Justice Statistics has said private prisons represent nearly 10% of all state and federal prisoners in America. Suffice it to say, the privatized prison industry would like to see a state in which it could widen the pool of potential inmates and its share in this negative market.

The biggest for-profit prison outfit is Corrections Corporation of America (NYS: CXW) . Bloomberg BusinessWeek conducted an in-depth expose last year, revealing allegations that lobbying for contracts with agencies like the Immigration and Customs Enforcement have helped bolster this company's bottom line. ICE pays Corrections Corp. about $90 every day for each immigrant it keeps behind bars while they are processed for potential deportation.

Illegal immigrant issues are big business for companies such as Corrections Corp. and rivals such as the Geo Group (NYS: GEO) (formerly known as Wackenhut) and privately held MTC. Corrections Corp. lobbied for Arizona's Senate Bill 1070, which allows police to haul in and hold suspected illegal immigrants. Clearly, that widened the pool of people who could be put away in private prisons.

Really, any more stringent law that increases prisoners helps these companies. Take mandatory minimum sentencing laws and "three strikes and you're in the big house" rules. Incidentally, right now efforts are under way to narrow the terms of California's three strikes law, aiming to make early release a possibility for nonviolent third offenses.

Cost savings...at what cost?
The aforementioned issues are just a tip of the iceberg when it comes to ethical considerations regarding the for-profit prison industry. Some critics contend that private prison companies actually devise ways to collect the more mellow lawbreakers for their facilities, since they're easier to handle (and therefore "cheaper"). In other words, they'll leave more difficult cases to the state.

Speaking of states, the economic environment may be helping these companies. That's not just because of the upswing in desperate folks who break the law, but also because a new trend may be building in which private prison companies buy up beleaguered state-run facilities in the zeal to balance government budgets. Corrections Corp. recently purchased a state facility in Ohio.

On the other hand, some states are actively blocking these privatized prisons' attempts. Florida's Senate recently shot down these contractors' attempts to do business there.

Granted, violent criminals who hurt and trespass against others do need to be put behind bars. Illegal immigrants should pursue legal status to pursue their dreams or better their lives in America. Regardless, an industry that has a profit incentive that's directly linked to locking people up is a frightening thing to contemplate.

Worst of all, though, the business model relies on some of the most tragic elements of society. Some people commit crimes because they're desperate, some because they suffer from untreated mental illness, and some because they simply don't care about others. Our society does require discipline and consequences for serious negative actions. We do need to underline that some choices are the wrong ones, and individuals must be held accountable for the serious, harmful ones.

However, there's a fine line between reasonable, rational sentencing and simply creating financial incentives to lock more and more people up whether it makes sense or not.

Avoiding negative business models
Many investors have no qualms about investing in sectors like this one. William Ackman's Pershing Square Capital Management was a Corrections Corporation of America shareholder until last summer, for example. The stock is also a Motley Fool Stock Advisor recommendation, so obviously some of my most respected investor colleagues aren't too squeamish about this industry.

However, we investors always have a choice about which companies we'll invest in and why. I hope more investors will think long and hard about the ways in which the companies they invest their hard-earned money in generate their profits. And then take one more step, and ask what these business models really mean

I know what this business model means for me: The for-profit prison industry isn't fit for my portfolio. Maybe I'll miss some stock returns, but at least I'll be able to sleep at night.

Check back at Fool.com every Wednesday and Friday for Alyce Lomax's columns on environmental, social, and governance issues.

Editor's note: A previous version of this article mistakenly said that Pershing Square still had a position in Corrections Corporation of America. The Fool regrets the error.

At the time this article was published Alyce Lomax does not own shares of any of the companies mentioned. The Motley Fool owns shares of Bank of America. Motley Fool newsletter services have recommended buying shares of Corrections Corporation of America and Goldman Sachs. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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