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The Greatest Defensive Stock You've Never Heard Of

 March 15, 2013 10:41 AM

Despite the S&P 500's 106% rally since March 2009 and a clear upward momentum, there are plenty of bears worried about a correction, or worse, another 2008-style meltdown.

That has driven huge capital inflows into bond funds and conservative segments of the stock market like utilities and dividend payers. No doubt, those are good options for investors worried about another bear market, but I've discovered a stock that is even more resistant to economic weakness.

Although the company's stock fell in 2008 with the market because of the liquidity crisis that gripped the Street, revenue and earnings chugged higher, with its core business virtually unaffected by overwhelming weakness in the economy. But the company's defensive posture doesn't come at the expense of growth. After bottoming out with the S&P 500, shares are up a market-crushing 200% in the past four years. Take a look below.

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Corrections Corp. of America (NYSE: CXW) is the largest private owner and operator of detention and correction facilities in the United States. In addition to managing 67 facilities in 20 states with almost 100,000 beds, the company offers rehabilitation and educational programs. It has a market cap of $3.8 billion.

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Corrections Corp. has been steady in the past decade while the economy has experienced dramatic volatility; revenue has grown in each of the past 10 years, up from a little more than $1 billion in 2003 to $1.76 billion in 2012.

But looking forward, there are two very good reasons why this company is in a position to continue its impressive ascent.

Pure demand

Federal and state governments account for about 90% of the domestic prison marketplace. The remaining 10% of the market is filled by private companies -- Corrections Corp. is the largest provider. But the federal and state prison systems are suffering from overcrowding and funding issues due to ongoing fiscal deficits.

A 2012 Government Accountability Office report called "Growing Inmate Crowding Negatively Affects Inmates, Staff and Infrastructure," concluded that the Federal Bureau of Prisons operated at 39% above recommended capacities.

That overcrowding is driven by consistent growth in the domestic prison population, which grew by 9.5% between 2006 and 2011, outpacing 7% growth in new beds and infrastructure, according to the Madison Times.

These conditions position Corrections Corp. to provide lower cost, superior facilities as the company plans to invest as much as $100 million into its detention centers this year.

Conversion to REIT

Another reason Corrections Corp. is a great stock for defensive investors is because of its recent conversion to a real estate investment trust (REIT).

As a REIT, Corrections Corp. is required to pay out 90% of its income as shareholder distributions. Under this new operating structure, Corrections Corp. recently announced a huge dividend increase of 165% to 53 cents a share. That means an annual yield of 5.6%, according to Bloomberg, making Corrections Corp. a serious pick for investors looking for income.

With that much potential income, this is the type of stock you might see in Carla Pasternak's High-Yield Investing newsletter.

Corrections Corp. should also benefit from its recent inclusion in the MSCI US REIT Index; there, any mutual or exchange-traded funds (ETFs) tracking the widely-followed index will be required to buy shares. Corrections Corp. is also expected to be added to the Dow Jones REIT Index in late March.

And Corrections Corp. still has value, trading with a price-to-earnings growth (PEG) ratio of just 1.21, a discount to the S&P 500's 1.41 and only a slight premium to its 10-year average of 1.12 times.

Risks to Consider: Shares have run up 47% in the past year. Even though the valuation looks good, profit taking could put some downward pressure on shares. Federal and state budget restraints could also weigh on demand.

Action to Take --> Corrections Corp. is one of the most defensive stocks in the market. The company has grown sales and earnings in each of the past 10 years despite unusual amounts of economic volatility. Looking forward, Corrections Corp. is in a position to benefit from federal and state prison operators struggling to meet growing demand. And with an attractive valuation and hefty dividend yield of 5.6%, this stock is a unique combination of growth, defense and income.

--Michael Vodicka

Michael Vodicka does not personally hold positions in any securities mentioned in this article. StreetAuthority LLC does not hold positions in any securities mentioned in this article.


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