🤑247capital #6 | $GEO🤑
Follow-Up, Stock Brothers $GEO, Report of the week $TME, Earnings for the Week, ...
Hi Everyone 👋,
Welcome to the #6 issue of 247capital — your weekly source of Investment Research. If you are new, you can join my email list here.
The follow-up to former Issues
$TAP - bought at $44,95 - Issue 1
Closed the week at $51,90 (up 15,46%).
No significant news since last week. So as of today, it seems as we quite managed to buy the dip, with today trading around $53.
Stock Brothers - GEO Group Inc- $GEO
Share price: $7,69 * Market Cap: $938M * EPS: 0,94 * P/E Ratio: 8,16 * Dividend: 12,89%
Monday, April 05th, 2021 - Florian is back with new research results.
Today I want to deal with a company that could change the way we view the world of stocks. Up until now, stocks were largely fundamentally valued or analyzed using charts.
Put, the question was, Is the company making a profit?
What is the price/earnings ratio?
How is the company perceived on the market?
Does the company have a positive image, or does the company have many lawsuits in court that tie up a lot of capital?
Is the company active in an industry of the future, or is it a dinosaur taking its last breath?
A new component comes into play, which was already there in the past, but which is becoming more and more important for the stock market. The component I am talking about is not described in the word politics.
The correct word is ideology.
What is the difference for me personally, and what was different 10 years ago? Political framework conditions and regulations have always existed. Whether taxes, tariffs, trade embargoes, wars ... nothing new.
However, the ideology currently on the agenda is new. During the Cold War, the Western world had done everything possible to win the race against the so-called class enemy by producing higher quality goods.
Just think of cars, watches, fashion, travel, food; there was no shortage and no need in the western world and no social impoverishment. This was mainly due to the trust in the mechanisms of the market.
The consumer wants a product. The producer made it available to the consumer against payment. The beer tastes good. Cold beer tastes better.
As a result, there are not only breweries but also manufacturers of refrigerators. As simple as this example is, this is exactly how the economic model worked. Now we understand that many consumers want to drink a cold beer when the weather is nice. Still, the cold beer provider is not allowed to open it because this is prohibited by law or regulation and is subject to high penalties.
Restaurants, bars, and cafes have closed because there is a lack of potential customers but because an ideology is against mass consumption.
Since I am not an ideologist myself, but my focus is on the economic perspective, I will not classify Western societies' ideological in the category good or bad, but rather incorporate this fact more into the evaluation of future investments.
The company I would like to deal with a little more intensively today is:
The Geo Group ($GEO)
The company is currently being discussed a little more in various channels. What does The Geo Group do, and why is it so controversial?
The Geo Group (GEO) is a private prison operator whose shares are publicly traded. This is a REIT, which means that the company is legally obliged to distribute profits to shareholders in dividends in a legally prescribed amount.
Another public prison operator is CoreCivic (CXW). Since CoreCivic chose not to pay a dividend, they have also lost their REIT status. After I mentioned the company in today’s newsletter, you probably took a quick look at the chart and wondered what kind of falling knife that is.
Or to put it more directly, what the hell is that bad company?
I want to try briefly and concisely to bring some light into the darkness.
The high exchange rate fluctuations always take place in the year in which the American president is elected.
While the Republicans are more of a Geo-friendly party, the Democrats are more of a Geo-unfriendly party. The Democratic Party has long advocated closing private prisons. The fear of investors was clearly evident in the election years.
To over $ 30 per share, the high price increase came about after Donald Trump’s election victory. Now it is getting exciting. Shortly after Joe Biden’s election victory, he actually issued a decree or decree that prohibits private prisons from entering into further contracts with government authorities and vice versa - see link below.
Then panic arose, and the price of the GEO share fell below $7. The Executive Order is a DIN A4 page and can therefore be read through quickly yourself.
I come to the following conclusion that Government must not renew contracts with private prisons. So it is not questioned whether the capacities are needed or whether the crime rate is falling or rising, but an ideological point of view is poured into the legal text.
So we are at the above point with the cold beer and the restaurants, only, in this case, some criminals are denied access to the private prison.
I am also attaching the statement from The GEO Group (GEO) to the new framework conditions. This order directly affects or jeopardizes around 27% of sales. What is now the opportunity for the company?
The Geo Group has facilities in the USA and Australia, South Africa, and the UK.
The company earns its money not only by imprisoning the prisoners but also by implementing rehabilitation programs. Also, services between THE GEO Group and the immigration authorities will be possible in the future.
This is where The Geo Group can help, for example, with establishing the identity of the immigrants. Since the border with Mexico has become more permeable under the Biden government, this line of business of The Geo Group (GEO) will grow significantly with the consequence of increased immigration.
Even if no new contracts with private prisons are allowed to be concluded, GEO could have the option of renting the buildings to the government, i.e., state authorities, because they cannot build prisons overnight, provided that humane standards are adhered to.
Conclusion
Since we are already invested in The Geo Group(Average price: $11,79), the question arises whether we’ll sell, keep or buy the shares.
Long story short: We’ll not sell, even if one could speak of a dividend trap with a current very high dividend yield of over 12% and falling prices at the same time.
So how do I personally see the risk/reward ratio?
Basically, one thing is clear, no matter what society has looked like in the past or how it will look in the future, there have always been criminals, and there will be in the future. The only way to protect people from serious criminals is to go to prisons.
From a moral point of view, some people say you shouldn’t invest in private prisons. But the reasoning is wrong, in my opinion.
After all, pharmaceutical companies do not earn money with healthy people either. They alleviate or heal diseases. Pharmaceutical companies do business with sick people and thus enrich themselves from an illness is also too short-sighted.
Geo helps strike a balance between security and protection on the one hand and deterrence on the other. Without prisons, we would be in anarchy.
Under $7.50, The Geo Group is definitely a company to start thinking about. Under $7.20 we’ll double our current position and lower the average buying price to $9.50.
But as always, everyone has to decide for themselves as well as further research.
So if you had to name a company where the guns are thundering, the blood is in the streets, and the political circumstances are difficult, The Geo Group would be shortlisted.
$GEO Related Links:
https://www.whitehouse.gov/briefing-room/presidential-actions/2021/01/26/executive-order-
https://www.geogroup.com/GEO-statement-on-President-Biden-DOJ-EO
Quote of the Week
“In investing, you get what you don't pay for”
- John Bogle
Earnings for the Week - Beginning April 05, 2021
Report of the week
Kerrisdale Capital published a long report about Tencent Music Entertainment Group ($TME - $64,5B), the leading streaming music service in China with over 800m active users. $TME operates an online music entertainment platform and music applications in China. The Company's platform comprises online music, online karaoke, and music-centric live streaming services supported by content offerings, technology, and data. The Company's main platform includes QQ Music, Kugou Music, Kuwo Music, WeSing, Kugou Live, Kuwo Live, and others.
“Spotify of China showing good progress monetizing its biz, shifting customers from unpaid to subscriptions & ramping up ad rev. $BABA shut down competing music streaming ops in Jan & long-form audio provides additional growth. $TME worth $35+ if recovers to recent 10x rev mult”
Got Feedback, Questions, or Suggestions? Just Hit Reply; I’d love to hear your comments.
Until next Monday,
Sebastian from 247capital