Shares of two major prison stocks dropped sharply Thursday after a report the U.S. Justice Department will end the use of private prisons. But at least two analysts said the decline was overdone.
"The massive falloffs in the stocks imply that the risk will spread to other federal, state and local jurisdictions. While this is possible, we believe it is unlikely. As such, we think today's stock action is more based on fear than actual cash flow risk," said Ryan Meliker, analyst at Canaccord Genuity, which maintained Thursday a "hold" rating on Corrections Corp. and a "buy" on GEO.
Corrections Corp. of America and GEO both briefly plunged more than 40 percent in midday trade. Trading in both stocks was intermittently halted amid their decline Thursday. The stocks ended the day down more than 35 percent and 39 percent, respectively.
"The DOJ plan notes that there are 13 private prisons run by companies like GEO and CXW. It does not impact state contracts, ICE contracts or US Marshall contracts," Meliker said in the note, which pointed out that GEO has 11 percent exposure to the federally contracted private prisons and CXW has 9 percent exposure.
SunTrust Robinson Humphrey analysts also said in a Thursday note that the sell-off was "overdone" and that contracts with the DOJ will likely be reviewed individually over time, spreading out the risk of revenue loss. The firm has a "neutral" rating on CXW and a "buy" on GEO.
To be sure, states' use of private prisons has been under protest.
Exposure to those state operations is declining. Corrections Corp said in a 10-K filing last year that state customer business constituted 42 percent of total revenue in 2015, down from 49 percent in 2013.
The news was initially reported by The Washington Post, which cited a memo from Deputy Attorney General Sally Yates instructing officials to either not renew private prison contracts or "substantially reduce" their scope.
The goal is to ultimately end the Justice Department's use of the privately operated prisons as they provide lower quality services and are less cost efficient, the report said.
Ending federal use of private prisons is part of Democratic Presidential Nominee Hillary Clinton's justice reform platform.
—CNBC's Robert Ferris contributed to this report.