This Company Performs Well During Recessions
The Dynamic Wealth Report
December 5, 2008
Three Great Companies, Which One Will You Choose?
It’s official. The National Bureau of Economic Research waved their
magic wand and decreed the end of economic expansion. The official
proclamation calls the recession start date as December 2007. I just
don’t understand what took so long for them to figure it out?
I mean really. Twelve months to decide we’re in a recession… I was
calling a recession months ago.
So what happens next? Now that we’re officially in a recession there’s
only one big question: When does the recession end? Now everyone’s
guessing.
Here’s the thing. Nobody’s going to be perfect in predicting the end of
the recession. But the perception we’re exiting one is key to the next
rally in the market.
But, we’re getting ahead of ourselves.
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We can make money in a recession… from the recession.
I’ve found a business that’s not only recession proof but thrives in a
recession. Here’s the thinking… Recessions and other periods of economic
downturn naturally lead to increased crime rates. According to the
Chicago Tribune, in the last 60 years, crime rates have increased during
every recession.
It's sad but true. Higher crime rates mean an increasing prison
population.
Now, it’s hard to celebrate having more people in prison. However, lots
of people in prison mean big profits for a few select companies. See, a
significant portion of the US prison population is housed in privately
owned correctional facilities. And some of the companies running these
businesses are publicly traded.
Before I tell you about these companies, consider these facts.
This year more than 1.57 million people will be housed in privately
owned prisons. Ten states are expecting their prison populations to
increase by 25% between 2006 and 2011.
Here’s the kicker… Its estimated private prisons operate more
efficiently than their government run counterparts. 15% more
efficiently.
The private prison business is expanding. There are three public
companies benefiting from the trends in the prison system. All three
prison management companies are doing well. But which one should we buy?
Cornell Companies (CRN) has a market cap of $315 million. In the last
twelve months they’ve done $377 million in revenue and have a P/E ratio
of about 15x.
Geo Group (GEO) is the second largest private prison management company
in the US. They’ve got a market cap of $869 million and did just over
$1.0 billion in revenue. They have a P/E ratio of 16x.
Corrections Corp of America (CXW) is the 800lb gorilla in the industry.
They have a $2.0 billion market cap, recorded more than $1.5 billion in
revenue and they have a P/E ratio of just over 14x.
Choices, choices, choices… which one would you buy?
Of the three, I’d pick the big guy. I’d select the 800 pound gorilla in
the industry. I think they’re poised to outperform everyone in the
group.
As it now stands, they have the best financial metrics… but you had to
dig a bit deeper to uncover the good stuff.
CXW has really strong gross margins, 28%. That’s higher than the other
two companies. Operating margins are even better. They post a robust
18%. It’s double the gross margins of GEO, and more than 15% higher than
CRN.
Here’s the clincher.
Despite all three companies having relatively close P/E ratios, CXW has
the lowest PEG ratio. With a PEG ratio of 0.75x they’re significantly
undervalued on a growth basis. If I had to pick one of the three
companies my choice would be CXW hands down.
• Red Hat (RHT) was upgraded to a “Buy” at Jeffries. The analyst
cited their big cash position as a reason to own the stock.
• Rio Tinto (RTP) was downgraded by JP Morgan to “Neutral”. The stocks
down almost 90% from its high just a few months back.
• Cannacord Adams just started research coverage on Ituran Location
(ITRN). The stolen vehicle tracking and recovery company received a
“Buy” rating.
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