Why CoreCivic’s (CXW) Rise in Unusual Options Volume Presents High Risks

With thousands of publicly traded enterprises to choose from, it’s not impossible for the oddball enterprise to occasionally steal the spotlight. And that’s exactly what happened last Friday with the exceptionally controversial firm CoreCivic (CXW). Billed diplomatically as a government solutions provider, CoreCivic really makes a living as a privately owned prison. And that makes any investment toward CXW stock morally questionable.

Sure, at the moment, the market might be buzzing about Anheuser-Busch (BUD) and its contentious decision among some segments of U.S. society about its partnership with social media star Dylan Mulvaney. As a quick recap, Mulvaney gained both fame and notoriety for documenting her gender transition on TikTok.

Nevertheless, no matter what one’s belief is on the gender spectrum issue, how someone transitions (or not transitions) remains a personal choice. On the other hand, CoreCivic’s business of private prisons represents a significant challenge both to inmates, their families, corrections personnel and broader communities.

Despite such obstacles, CXW stock and its ilk have attracted bullish speculation during the post-pandemic new normal. Fundamentally, the initial ethos undergirding meme stocks centered on regular folks working together to profiteer off the high-rolling vultures of capitalism: basically hedge funds and other institutional investment firms.

However, bidding up private prisons reeks of hypocrisy. Here, the main goal is to profit off other people’s poor choices. And while those who commit crimes must pay their dues to society, that doesn’t necessarily mean that equity stakeholders should be the recipients of said dues.

Still, CXW stock continues to be a popular meme trade. Following the April 14 session, CoreCivic was a highlight of Barchart’s screener for unusual stock options volume. In total, volume reached 3,354 contracts against an open interest reading of 57,196. The delta between the Friday session volume and the one-month average volume came out to 1,467.29%.

Drilling into the details, call volume reached 3,349 contracts against put volume of 5 contracts. Mathematically, this pairing yielded a put/call volume ratio of 0.0015, on paper dramatically favoring the bulls. Still, investors should be careful about following the implications here.

CXW Stock Presents a Troubling Backdrop for All Involved

To be fair, CoreCivic and the private prison industry presents some positives for society that shouldn’t be ignored. Primarily, the development of such facilities may help reduce overcrowding at government-administered prisons, facilitating a safer environment for both inmates and correctional staff. As well, privatization may improve the inefficiencies so often plaguing government-run programs.

From a purely cynical perspective, social fissures may also boost CXW stock and the underlying industry. For example, evidence points to a general rise in crime rates since the start of the COVID-19 pandemic. As well, it’s quite possible that the economy may slip into recession. If so, desperation stemming from financial pressures may boost the crime rate, thus increasing demand for CoreCivic.

However, such cynical thinking increasingly has lost its appeal in American society. On a somewhat related note, this broader transition toward more progressive values underlines the reason why companies like Anheuser-Busch feel it necessary to voice support for various social issues. Therefore, CoreCivic will probably find an increasing hostile audience, potentially hurting CXW stock in the long run.

Also, the American Federation of State, County and Municipal Employees issued a critical argument: private prisons put communities at risk. The entity states that by “…cutting corners to boost profits, they endanger inmates and correctional staff alike.”

That might be the issue that ultimately turns investors against CXW stock. Too many times, people have witnessed corporations – such as airline manufacturers – not implement proper safety protocols, leading to devastating injuries or deaths.

For private prisons, the issue about safety isn’t just about inmates and their rights as human beings. Rather, cutting corners deeply affects the staff hired to administer these private facilities, potentially leading to a combustible mix. Therefore, the issues associated with CXW stock appear too toxic for comfort.

Limited Support from Wall Street

According to the Barchart Technical Opinion indicator, CXW stock rates as a 72% sell. Since the beginning of this year, shares tumbled nearly 19%. In the past 365 days, it lost nearly 29% of equity value. Over the longer-term framework, the performance is even worse, with CXW falling almost 54%.

Now, CoreCivic isn’t devoid of coverage. At the moment, two analysts peg CXW stock a buy, both with $15 price targets. On paper, this indicates upside potential of over 60%. Nevertheless, as criticisms rise against private prisons, fewer people will probably be willing to cover this sector.

Again, social mores are shifting toward equity and inclusion, not profiteering from poor choices that many sociologists would argue stem from gross wealth inequities. And that may be another reason to avoid CXW stock. Frankly, not many people will want to deal with the backlash that can materialize from supporting such controversial enterprises.

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On the date of publication, Josh Enomoto did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.