Federal decriminalization or de facto enforcement changes would not entail an automatic release of existing inmates, but individual governors could entertain the prospect of mass pardons, and a sharp reduction in new inmates would be enough to affect the revenue of for-profit prison companies.

A secondary risk is that state and local budgets may be in better shape than they were in previous years. CCA is poised to profit when states get into trouble, since states running their own prisons can sell or lease those facilities to private companies, hire the companies to handle all of the operations, and record a one-time or short term cost reduction on their budgets. As the economy improves and tax bases firm up, states may face less budgetary pressure to rely on for-profit companies like CCA. During the Q3 earnings call, CEO Damon Hininger explained that the short-term issues surrounding sequestration and the federal budget had caused some uncertainty but said that he expected a resolution within the next few months such that CCA's contracts would not be affected.

From an investing standpoint, there is no reason to look for immediate downside in CCA. The company just announced a better-than-expected quarter and the stock is up 62% in 2012. If there are any investors on the sidelines because of questions about the federal budget, a political resolution might even be good for a short-term boost in the share price. But it also looks like the risk of a policy change to fit the changing demographics of the U.S. electorate is not being reflected in the price of the stock or its options. If voters continue pushing successfully for decriminalization, investors might find themselves needing something to help them relax.


** CCA's own activities suggest some concern to ensure a favorable policy mix. In their 2011 letter to shareholders, the Chairman and CEO remarked that, "We do not work and have not worked to affect government policies that govern sentencing or detention policies. Staying out of the public debate on sentencing and criminal policies has been a long-standing corporate policy of CCA, and we believe it's the right policy." These statements appear to be plainly false, though. For some time, CCA executives co-chaired a legislative task force at the lobbying group ALEC aimed at influencing state lawmakers to pass pro-incarceration laws involving mandatory minimum sentencing, "three strikes" policies, etc. (The task force was disbanded after intense public pressure following the 2012 "stand your ground" gun law controversy, but appears to survive among ALEC's ongoing initiatives.) CCA was listed as a corporate member of ALEC in a 2011 research brief, and Laurie Shanblum, a senior director for business development, is listed as a member of the Executive Committee of the Private Sector for the lobbying group. Investigative reporting by a CBS affiliate in Arizona found evidence of CCA lobbyists and former lobbyists influencing the controversial SB1070 "show us your papers" legislation there; in a set of lucky circumstances for the company, legislators in receipt of political contributions from CCA in Pennsylvania, Florida, Tennessee, and other states have promoted similar laws. Perhaps the shareholder letter was partially correct: CCA has stayed "out of the public debate" on criminal policies because it has been able to work through private channels instead. No matter how we view the politics of these activities, none of this involvement seems suggestive of a company that is concerned to keep its distance from government policy. That is, the company's own concern to influence policy should make investors wary of adverse electoral outcomes.

OptionsProfits can be followed on Twitter at twitter.com/OptionsProfits.

Jared can be followed on Twitter at twitter.com/CondorOptions.
At the time of publication, Jared Woodard held no positions in the stocks or issues mentioned.

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