Geo Group (NYSE:GEO) stock has been making headlines this month. That’s not due to any news directly related to the private prison operator, but rather to a recent 13F filing submitted to the U.S. Securities and Exchange Commission (SEC) by investor Michael Burry.
As InvestorPlace’s Eddie Pan reported on Aug. 15, Burry’s firm Scion Asset Management has sold all of its U.S.-listed positions except for one — GEO. Why has Burry, who is bearish on the market overall, decided to stay bullish on this stock?
Chances are, due to its favorable risk/return position as a contrarian wager. Burry is no stranger to such plays. As depicted in the book and film “The Big Short,” Burry made a fortune betting against the housing market in 2008.
While you may not want to copy all his trades, you may want to follow his lead with Geo.
Why Burry Is Bullish on GEO Stock
While Michael Burry has been vocal about his very bearish opinion on the overall market, the investor hasn’t had much, if anything, to say about his bullishness on Geo Group shares.
Based on his investing philosophy, however, we can infer why Burry is long GEO stock. Burry is a contrarian investor. He goes against market trends, focusing on opportunities in areas that are misunderstood (and therefore mispriced) by the market.
“Misunderstood” aptly describes the current sentiment for private prison stocks. They’ve performed poorly in recent years. That’s mainly due to the fact that, per an executive order (EO) signed by President Joe Biden in 2021, the U.S. Federal Bureau of Prisons (BOP) and the U.S. Marshals Service are phasing out their use of private prison operators.
That’s not all. Since 2019, when big banks stopped providing financing to private prison companies, the market’s been concerned that companies like Geo will face a default down the road.
However, it’s not for certain that either or both of these risks will eventually send shares to zero. The company is at work to get its house in order and adapt to the industry’s “new normal.” If this happens, shares could make an epic comeback.
Big Upside If You Choose to Ride Burry’s Coattails
Michael Burry has likely bought GEO stock on the belief that the above mentioned concerns are overblown. Once the market comes to the same conclusion, the stock may have a path back toward $20-$30 per share, which it traded for in the late 2010s.
First, Biden’s EO will have only a minimal impact on Geo Group’s overall revenue going forward. According to its most recent 10K annual filing, the facilities affected by the order only made up 8% of its 2021 revenue. State and local prisons, along with Immigration and Customs Enforcement (ICE) facilities, make up a larger amount of its business.
Second, the company is proactively tackling its financing issues. Suspending its dividend last year, it’s putting its cash flow to work paying down debt. Again, this is a cheap stock, selling at a low multiple. The company generates a high amount of operating cash flow ($282.6 million) relative to its market cap (around $1 billion).
It has also been refinancing to extend its debt maturities. Put both of these together, and it’s easy to see Geo continuing to successfully de-lever its balance sheet. This will pave the way for resumed dividends and a further rebound.
Bringing back the dividend, even partially, could by itself result in a big move higher for GEO stock. As recently as 2019, it was paying out $1.92 per share in annual dividends. Simply partially reinstating its dividend (say, $1 per share annually) would likely get shares back to double-digit price levels.
Even better: it’s not a lock that, with the backlash against the industry, the company will see a steady (albeit manageable) drop in revenue. If political power shifts again in Washington, usage of private prisons by the BOP and the U.S. Marshals Service could resume.
Only time will tell whether Burry’s bearishness on the market proves true, but with a lot pointing to this particular wager panning, you may want to add a small, speculative position to your own portfolio.
GEO stock earns a B in my Portfolio Grader.
On the date of publication, Louis Navellier did not have (either directly or indirectly) any other positions in the securities mentioned in this article.
On the date of publication, the InvestorPlace Research Staff member primarily responsible for this article held a long position in GEO.