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Corrections Corporation of America Message Board

  • yahoo yahoo May 12, 2005 10:47 AM Flag

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    • I would rewrite the moral as "Beware the REIT".
      Why a growth company would choose a structure that
      requires distribution of accumulated and future earnings
      is way beyond me.

      Early on, we were told it
      was great because of the tax savings. Nonsense. The
      government gets less revenue, true, but the corporation's
      cash flow is reduced by more than two times the tax
      savings (they have to pay 95 cents to save 40 cents). In
      CCA/PZN's case it's worse. They bragged about a 25% tax
      rate, so it's closer to a factor four.

      We were
      also told that the REIT structure provided better
      access to capital. Maybe in 1997, but this company will
      only be able to get capital at fire sale prices for
      the forseeable future.

      The only thing going
      for PZN, vis a vis VC/VTR, is that the prison
      business is still booming. And the only thing worse than
      setting up a REIT is doing it in a taxable transaction
      that raises no capital (VC/VTR) - dumb and dumber.

      • 1 Reply to newMK
      • See 2757 for 1 & 2 (tax savings, access to
        capital)

        #3: Invisibility of OPCO. When the REIT was
        announced, we were told that because OPCO would be private,
        it "could do so much more" (exactly what, I've never
        known). While I would rather have OPCO private than
        public (controlled v. independent), there will be no
        invisibility because of the recent bond terms. Of course, the
        invisibility of OPCO is what aggravated analysts so much from
        the start.

        #4: Price stabilization. When CCA
        missed earnings in Q3 1997 because of ramp up problems
        (which were quickly fixed), the stock price dropped 25%.
        We were told that because OPCO's ups and downs would
        be taken out of the picture, PZN would have stable
        prices based on predictable revenues. CCA essentially
        missed earnings again because of temporary occupancy and
        ramp up issues. Attempts to keep these issues
        invisible (without forthright disclosure) has caused a
        bigger drop in market cap (from a less lofty price) than
        the 97Q3 problems did. And again, by popular demand,
        the invisibility is gone. The only thing worse than a
        cover-up is a blown cover-up.

    • I believe that the average time that a stock is
      held by investors (institutional + retail investor) is
      only 18 months. When analysts issue a Strong Buy or a
      Buy recommendation I always wonder what is their time
      frame - 6 months?..one year? A stock may be of mediocre
      value one year out but may be a great investment three
      years out. Five years seems to be an eternity in the
      investment world and yet if a stock doubles in price over 5
      years that's a 20% annual rate of return. Try holding a
      stock for 5 years - I've never done it but I wished I
      had on a number of stocks I've owned. So as I reflect
      on what has happened to PZN over the past few weeks
      I keep thinking about this time frame variable.
      When great things are expected of a stock one year out
      and things don't pan out, the stock gets clobbered
      yet that same stock could be a great one to hold onto
      for three or more years. I've also wondered what the
      average holding time is for those individuals who post
      messages here.....I tend to think that, on average, it is
      quite a short period of time.....like I said earlier I
      haven't been able to hold onto a stock longer than two
      years....it's really hard to "stay the course" for up to five
      years yet if you've picked a good stock you can get
      amply rewarded and save on all those commission and
      trading costs.

    • I certainly agree with you; PZN calls offer a
      high premium. I tend to look a little farther out-
      after all, with a REIT you are supposed to be getting
      all those dividends in the meantime if the options
      exercise.

      With PZN at 10.75 the November 12.5 calls were going
      for 1.5-1.75. So buying PZN at 10.75 and selling the
      covered call immediately reduces your investment to
      9.25/share. Getting two dividends before Nov reduces your
      investment to just over $8. If the calls exercise you get
      $12.5 back for that $8 in about five months- call it
      around a hundred and thirty percent annualized return on
      your investment after commissions.

      OR, if the
      calls don't exercise, you own PZN in November for
      around $8. IF you sell new calls at that time, and IF
      the December special dividend is paid (a very BIG if)
      then by the end of the year you probably have PZN for
      around $4/share.

      Which might be its selling price
      by that time, but it certainly presents a different
      way of looking at the risk. Compare the upside and
      the downside.

    • you're think about shorting not writing covered calls.
      Short - owe dividends
      Covered calls keep dividends but you can be exercised at any time until expiration.

    • i agree the current structure does not
      work...this was the docs doings....at some point someone
      should be held resposible for a billion dollar
      blunder....selling at 20 plus(if possible) is probably a better
      opportunity than hoping for better results for the next 6 to
      18 months...even if back to a c corp....doc would
      look like even a bigger jackass....doc needs to
      go...jr needs to go...and i agree we were better without
      the reit...thank god for little docs ideas...my guess
      is we will pay tens of millions to undue this
      mess...a lbo or buyout at 20 dollars looks good to me
      today....also would go along way toward limiting lawsuits

    • I thought you had to pass through any dividends
      to the call buyer when you sold covered calls or am
      I thinking about shorting the stock?

      If
      you're correct, selling covered calls now is a great
      idea.

    • Open question to the group...

      Do the
      option premiums seem high to you? For example, at the
      last trade price of 10.75, the Jul 12.5 Calls are
      priced at about 1/2. We all know that the common stock
      price will be adjusted downward for the dividend being
      paid at e.o.month. So, will the option strike price be
      adjusted down too?? If not, that 1/2 quote on the calls
      feels almost like free money. Sure the stock has been
      awfully volatile (in the wrong direction), but I was
      surprised to see any value if the "consensus" was so darned
      negative.

      Any additional observations WRT option pricing??

    • In reading your comment that the price for new
      equity is not accretive any more, I was trying to
      calculate at what price it would be. If they're paying
      $2.20, is the correct calculation to divide $2.20 by
      whatever they're earning? For example, if they're making
      20% on every invested dollar $2.20/.20 equals $11.00
      per share. 15%=$14.67 10%=$22 Is this right?

    • Ben Graham told a story 40 years ago that
      illustrates why investment professionals behave as they do:
      An oil prospector, moving to his heavenly reward,
      was met by St. Peter with bad news. "You're qualified
      for residence", said St. Peter, "but, as you can see,
      the compound reserved for oil men is packed. There's
      no way to squeeze you in." After thinking a moment,
      the prospector cupped his hands and yelled, "Oil
      discovered in hell." Immediately the gate to the compound
      opened and all of the oil men marched out to head for
      the nether regions. Impressed, St. Peter invited the
      prospector to move in and make himself comfortable. The
      prospector paused. "No," he said, "I think I will go along
      with the rest of the boys. There might be some truth
      to that rumor after all."

    • been speaking with several firms an major
      investors about the idea of finding a buyer..obviously not
      much chance within the industry but feel others
      including lbo firms may be....as even flipper said the reit
      does not work as they do not have access to money
      ....is not that the great reason for doc and jr grand
      plan...certainly not the milions jr was given for his great
      goldman ideas...the only solution other than crossing
      your fingers and waiting6 to 18 months to get back to
      20...is see if a buyer can be found

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