A Trip to Alcatraz and the Best Prison Stock in America

 
Today is May Day, so I could write about the complex history of the holiday and what it means to various people and groups today.  But I won't.  For me, May Day falls into the same category as Arbor Day and Saint Swithun's Day, holidays that, for better or worse, are largely ignored today.  In fact, I think that here in the U.S., those three holidays are probably less popular than that "Seinfeld" creation, Festivus!

When I think of Mayday I remember that the distress call MAYDAY, typically used by mariners in life-threatening situations, comes from the French "m'aider," meaning, "help me."  Knowing that fact has almost no value in real life ... yet I know it anyway.

My main topic today is Alcatraz, the island in San Francisco Bay that I visited Sunday as part of my trip to California.  The island is visited by some 1.3 million people per year, who come mainly to see the prison that housed such hard cases as Al Capone and George "Machine Gun" Kelly, and I enjoyed that part of the island visit thoroughly.  But I found further rewards by looking at the bigger picture, and considering the changing role of the federal government in managing the island over time.

To get there, however, we must start at the beginning.

History of Alcatraz

In the early 18th century, the island of Alcatraz was uninhabited, though undoubtedly visited by the Native Americans of the area.  Seabirds in particular have always loved the 22-acre island, and no doubt the Native Americans harvested their eggs from time to time.

The first European to visit the island was Juan Manuel de Ayala, who in 1775 charted San Francisco Bay and named the island, "La Isla de los Alcatraces," meaning "Island of the Seabirds (or cormorants)."

Back then, of course, the region was Mexican.  The first recorded owner of the island was Julian Workman, who in 1846 was "given" the island by his buddy the governor after promising that he would build a lighthouse there.

Workman quickly transferred ownership to his son-in-law Francis Temple, and when hostilities between Mexico and the U.S. ended, Temple sold Alcatraz, for $5000, to Charles Fremont, the American Military Governor of California, who fully expected compensation from the U.S. government.  This was not the first time that Fremont had overstepped his authority, and the government refused to reimburse him.  The U.S. simply assumed ownership.

In 1849, gold was discovered in California, spurring a wave of immigration from the East that swelled the population of San Francisco, turning the small town into a rich city.

In 1850, Congress appropriated money for building eight lighthouses on the Pacific Coast, one of which was on Alcatraz.  By 1855, the lighthouse was accompanied by gun emplacements, the United States' first permanent harbor defense batteries of the West Coast.  During the Civil War, the 86 cannons on Alcatraz defended the bay against the threat of Confederate raiders.  The island was never attacked, and the guns were never fired at enemy forces.

Alcatraz as a Prison

But it was during the Civil War (under President Abraham Lincoln) that Alcatraz was first used as a military prison, and its capacity was expanded in 1898 when the Spanish-American War brought about a huge increase in prisoners on the island.

Then, in 1934, control of the island was shifted from the military to the Bureau of Prisons, so it could cope with the wave of gang violence that followed the Depression and Prohibition.  The feds wanted a very secure prison where they could send inmates who had histories of unmanageable behavior or escape attempts, as well as high-profile inmates who might prove disruptive in other prisons.  Fitting those descriptions to a T, naturally, were Al Capone and "Machine Gun" Kelly, as well as Robert Stroud, the "Birdman of Alcatraz."

Over the decades that the prison was in operation, there were dozens of escape attempts, and while a few men managed to reach the water, none are known to have left it alive.  In hindsight, they would have been no less successful if they'd simply cried MAYDAY through the bars.

Despite the prison's success, however, it closed in 1963.  Attorney General Robert Kennedy wanted America's prisons focused more on rehabilitation than detention, and announced the creation of a brand new maximum-security prison in Marion, Illinois.  Alcatraz needed a $5 million dollar renovation.  And the costs of running a prison on the island were out of proportion; a survey found that while it cost $9.27 a day to house and secure an inmate in mainland prisons, it cost $23.50 a day to house and secure each inmate on Alcatraz.  As the very last convict to depart left the island, he commented to reporters, "Alcatraz never was no good for anybody!"

National Historic Landmark

In July of 1964, Alcatraz was turned over to the U.S. General Services Administration.  The land was offered to several government agencies, but no one wanted it.

So it lay unused for years, and in late 1969, while the Vietnam War was in full swing and protests of all sorts were in vogue, a group of roughly 90 Native Americans took possession of the island.  Calling themselves "Indians of All Tribes," they offered to purchase the island from the government for $24 worth of glass beads and red cloth, claiming this was the price their people had been paid in exchange for a similar island on the other side of the continent nearly 300 years before.  (Manhattan, however, with 21,612 acres, is nearly a thousand times larger.  The proportionate price for Alcatraz would have been just two and a half cents ... without factoring in inflation.)

Of course, the government refused their offer.   But winter on the island was unpleasant, and the Native Americans were lacking in organization, so the size of the group slowly shrank.  In June 1971, several buildings on the island were destroyed by fire.  Soon after, the 19 months of occupation came to an end when the remaining 11 interlopers were forcibly removed by government troops in a pre-dawn raid.

A year later, President Richard Nixon signed into law the House Resolution establishing the Golden Gate National Recreation Area, incorporating the island of Alcatraz.  A year after that, Alcatraz Island officially opened to the public.  In 1986 it was declared a National Historic Landmark.  Today, operated by the National Park Service, it plays host to roughly 1.3 million visitors a year.

Much of the island is still a mess.  Rubble from the burned buildings lies in piles, and many buildings remain abandoned, windowless.  Much of the island is ruled by sea-birds, and their droppings are amply in evidence.  But the tour of the cells is terrific; wearing an individual MP3 player, you hear the sounds the prisoners would have heard.  You can wander about most of the island as well; we spent about three hours there.  And the gift shop (which I resisted) is overflowing with all things Alcatraz.

With a ticket price of $24.50 and 1.3 million visitors per year, I figure the concession operator is bringing in more than $30 million per year ... the gift shop, millions more.  Someone, I think, is getting rich.

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What's next for Alcatraz?

The U.S. government certainly has no grand plan.  Throughout history, it's been content to use the island for whatever seemed most necessary.  Today, with the island in the hands of the National Park Service, the government is coasting, milking the deteriorating remains of its former uses while a happy public pays to traipse about.  And maybe this is best.  The island seems to be paying its own way now, supported by the payments of tourists ... many of whom, by the way, are from foreign countries.

But my mind can't help wondering if bigger and better uses are possible.

The Global Peace Foundation proposed to raze the prison and build a peace center in its place, a plan that was estimated to cost about $1 billion.  But voters in San Francisco rejected the plan just this February, with 72% of voters saying no.

The idealist in me says the Native Americans deserve it, as a token payback for the crimes of centuries past.

The capitalist in me envisions a gambling mecca, perhaps Wynn Alcatraz Resort and Casino (WARC).  While construction expenses would be astronomical, I assume it would be very profitable.

Combining those ideas, I see it as a Native American Casino Resort, the purchase and construction funded totally by the cooperative efforts of existing tribes.  Ironically, one of the long-term results of the Native American occupation of the island was a renewed respect for the problems of Native American tribes, which eventually led to the granting of casino licenses in numerous states.  This one change has not only brought financial security to numerous tribes, it's also enabled the strengthening of tribal identities.

And dare I say it's made the Native Americans happier, more complacent, and less eager to fight for the rock in San Francisco Bay.  So I don't think that will happen either.  I'd be happy to hear from San Franciscans on this one.

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Private Prison Company

Finally, I turn to the subject of prisons in general.

Last week we learned that while the U.S. had about 5% of the world's population, it has about 25% of the world's prisoners.  I think that's excessive, and I believe the biggest reason may be the War on Drugs, which, just like Prohibition, makes criminals of people trying to fill a market demand.

If I were president, I'd take steps to address this problem, ideally by legalizing many drugs and taxing their sale in the same way we tax tobacco and alcohol.  But I'm not going to be president, and I don't see any of the main contenders for the office thinking this way, so it appears that the prison system will remain very busy.

The U.S. federal government is the largest operator of prisons in the country.  After that come three states, Texas, California and Florida.  And after them comes Corrections Corporation of America (CXW), the company that invented the privatized prison industry in 1983 and now has over 50% of the market.

Corrections Corp. operates about 72,500 beds in 65 facilities, housing and treating men, women and children at all levels of security.  Its biggest customer is the Marshals' Service, followed by the Bureau of Prisons and then Immigration and Customs Enforcement.  It serves nearly half the U.S. states, and its contract renewal rate is 95%.  The company has a good, if uneven, record of long-term growth.  Revenues in 2007 were $1.48 billion.  Earnings were $1.07 per share.  In 2008, $1.25 is forecast, and in 2009, $1.50.

The stock is currently trading around 26, giving it a price/earnings ratio of 23, and just 20 on future earnings.  So the valuation seems fair.  It's a not a dirt-cheap value stock, but neither is it a high-risk growth stock.  Finally, the chart says this is probably a decent buying point.

After peaking at 33 last July, the stock corrected to 24 in August and then touched 23 this February, in what was almost certainly a final wave of selling.  Since then the stock has spent most of its time in the upper-20s.  I think buying here, while it's trading between 25 and 27, is highly likely to pay off in the year ahead.

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Yours in pursuit of wisdom and wealth,

Timothy Lutts
Publisher
Cabot Wealth Advisory

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Timothy Lutts can be found on Google Plus.

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