2CHYP had a good week relative to the broader market. We were buoyed by 2 main factors:
- REITs are more isolated against geopolitical events due to their domestic nature. Thus, REITs were not as impacted by the trade war progression with China.
- The specific securities in the 2CHYP portfolio overwhelmingly had strong 1st quarter reports. Check out the details in the earnings updates within the portfolio analytics section of our website.
Fundamentals eventually win and this was particularly apparent in our stocks that have been sold off for non-fundamental reasons.
Core Civic is an exceptionally well-operating REIT with sizable growth potential in the near and medium term. This became readily apparent through the huge beat on its earnings and guidance. It is not often that REITs can up guidance by this magnitude as the contractual nature of revenues usually foreshadows the number. However, this beat snuck up on the market because it came from new incremental sources of revenue that were not in the models. We anticipate CXW being one of our better stocks for the remainder of 2019. The few percentage points CXW has gained in recent days is merely the tip of the iceberg as this should be a $30 stock.
Nothing about CXW’s fundamentals suggest it should trade at a low multiple, which indicates the low stock price is largely or entirely the result of ESG investing (environmental social governance). I fully understand that this is a sensitive subject and would never encourage those who do not feel comfortable with the business to own the stock. As a fiduciary, my job is not to invest for my own emotional comfort, but rather to maximize the financial gains of my clients. And to that end, there is a large opportunity for outperformance related to the fundamentally unjustified discount at which CXW trades. The discount is currently substantially larger than the normal “sin” stock discount and we suspect the discount will be eliminated over time.
CXW goes to great lengths to operate ethically and they are now spreading the information about their ESG policies and operations. I believe this will go a long way to reduce the general public’s animosity toward CXW and should unlock the share price to move closer toward fundamental value.