NEW YORK (TheStreet) -- Corrections Corp. of America (CXW - Get Report) and Geo Group (GEO - Get Report), the largest U.S. prison operators with a combined 86% market share, have long been touted as ironclad investments based on two trends: the rising prison population and government outsourcing of penal services.

But those companies' lock on the industry is loosening.

The Federal Bureau of Investigation last week reported that violent crimes fell 6.1% in 2009, the third consecutive year of declines in such crimes, the type that most frequently contribute to lengthy jail sentences.

Also in 2009, the state prison population dropped for the first time in 38 years, by 0.3%. While small, that came as a surprise, given the eightfold increase between 1972 and 2008, the Pew Center on the States reported.

Criminologists cite a variety of reasons for the trends: an aging population, the recession and judges' increasing willingness to seek alternatives to prison sentences, such as putting non-violent offenders on probation, releasing well-behaved prisoners earlier than required under sentencing guidelines, or giving some home detention and equipping them with ankle bracelets for monitoring.

Those factors keep a lid on growth in the prison population, which bodes poorly for the private-prison industry.

That's already showing up in the numbers. Revenue at industry bellwether Corrections Corp. of America was up only 2% in the first six months of the year, and operating income was flat. Its 2010 earnings per share guidance is in the range of $1.26 to $1.30, aided by an aggressive share-buyback program. Last year the company earned $1.32 per share, which contributed to a five-year record of 21% annual earnings per share growth.

Shares of Corrections Corp. of America are down 6.6% so far this year, underperforming the S&P 500 Index's 2.5% gain, and have declined 17% over three years.

Geo's shares are up 6.3% this year, but most of that came after its announcement in April that it would acquire Cornell Co., a smaller rival, in a $685 million deal that included a hefty 35% premium on Cornell's outstanding shares. Geo's shares are down 26% over the past three years, more than Corrections Corp. of America's.

Still, some analysts give Corrections Corp. of America and Geo high marks, primarily based on the expectation that government entities will increasingly outsource detention services as cost-effective alternatives to making the huge investment it takes to build new prisons and staff them.

Barclays Capital analyst Manav Patnaik, who has "buy" ratings on both firms, said in a recent research report that state prisons still anticipate their inmate populations will grow. And only four states have authorized funding for new prison construction next year, and none acted upon it, suggesting demand for new private-prison housing will continue.

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