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Why CoreCivic Stock Popped 10% This Morning

What happened

Shares of CoreCivic (NYSE: CXW), a real estate investment trust (REIT) that owns jail and halfway-house properties tied to the criminal justice system, jumped more than 10% in early trading Wednesday and remained up 7.3% at 11:15 a.m. EDT today.

This morning, S&P Dow Jones Indices announced that tiny CoreCivic will replace even tinier offshore driller Valaris (NYSE: VAL) on the S&P SmallCap 600.

Image source: Getty Images.

So what

Investors are bidding up CoreCivic stock in response, and to an extent, that makes sense. CoreCivic's addition to the SmallCap 600 index doesn't take effect until Aug. 17, after which date it can be assumed that mutual funds and ETFs that track the composition of the SmallCap 600 will buy CoreCivic shares so that their holdings accurately reflect the index. Some investors probably think they can front-run the buyers by buying up shares themselves before the change takes effect.

But CoreCivic isn't climbing up the ranks of publicly traded companies, performing better and better, growing in market cap, and ultimately winning a place on its new index. Rather, CoreCivic is underperforming the market. Last quarter, earnings tumbled 54%, and CoreCivic shares are down 47% in the past year.

Now what

So CoreCivic is really being demoted from the larger S&P MidCap 400 index and relegated to the list of smaller companies.

If some mutual funds and ETFs that track the SmallCap index are forced to buy CoreCivic shares next week, then other mutual funds and ETFs that track the MidCap index will be forced to sell CoreCivic shares. So it's a wash, and I expect to see little buying pressure lifting the stock next week.

Add to that the fact that CoreCivic's business is also underperforming, and I see little reason for investors to buy the stock today.

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Rich Smith has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.


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