GEO Group Stock: Rising From the Ashes (Technical Analysis) (NYSE:GEO)

Investment thesis

The GEO Group (New York stock market :GEO) has recently come to the attention of the investment community, as investor Michael Burry disclosed a significant stake in the company, as filed on August 15, 2022 as his only stake via his Scion Asset Management company. This article does not focus on the fundamental reasons that may have prompted investors to buy a position in GEO, but I want to give an overview of the technical aspects characterizing this stock and its industry. Investors should be aware of the technical potential but also of the risks involved in investing in GEO. A favorable risk/reward profile of GEO leads me to classify this action as a buy position, while I will also outline where I would set appropriate stop-loss levels.

A quick overview of the big picture

The industrial sector in the US has fared better than other groups in the economy over the past year and now appears to have gained some relative strength over the past 3 months. While the sector is dominated by the airport and air services industry, manufacturers of agricultural and heavy construction machinery, as well as rental and leasing services, companies in the security services industry and protection have been somewhat of a laggard over the past year, recovering slightly over the past few months.

Looking at more specific industry groups, the ETF Emles Federal Contractors which I considered one of the benchmarks was delisted on October 19, 2022, but I also consider the Nasdaq US Benchmark Security Services (NQUSB50205040N) which marked its All-Time-High (ATH) on June 8, 2021, and has since corrected significantly, losing around 49% to the trough on July 5, 2022, where it immediately returned and broke above its 200 EMA , signaling a substantial increase in relative strength and positive momentum in what appears to be a new uptrend.

Analyzing the historical performance even further, GEO’s stock has performed significantly worse than its major benchmarks most of the time from 2018 to 2021, resulting in a very poor performance of -67.23% over the last 5 years. Its larger peers had similar negative performance, with CoreCivic (NYSE:CXW) reporting just slightly fewer losses over the same period, and The Brink’s Company (NYSE:BCO) recording a loss of -32.77%. All the major benchmarks could do pretty much better, even the broader market benchmark tracked by the iShares Russell 2000 ETF (IWM) posting a performance of 13.55%.

Where are we now?

GEO reached its ATH on April 26, 2017 and, after an initial retracement of a significant decline, entered its long-term downtrend in October 2018, to the trough on May 27, 2021, and has since formed a reversal of medium-term trend as we can see on the weekly chart, where the stock has managed to overcome its EMA50 and is now trying to confirm its breakout of strong resistance at its EMA100.

The stock has been showing positive momentum since April 2022 and accumulating significant relative strength, thanks to the increase in average weekly volume. The long streak of losses over the past few years has certainly discouraged many investors, as the stock has been in phase four for 5 years. With the bottoming process lasting over 42 weeks, the stock could potentially try to move into the second leg, if true strength is confirmed and overhead resistance is overcome.

What comes next?

I expect the stock to continue to perform positively in the near term as it is on track at the lower end of the trend to reach its next broad resistance at $9.81. On its daily chart, if the stock makes a break above this level, its next major hurdle is likely set at $11, with potential upside between 15-30% from its last close.

On the other hand, the stock probably has several important support levels that should be taken into account, other than its moving averages and especially its EMA50, which can be defined as its trailing stop for shorter-term traders. To achieve consistent growth, a stock needs substantial institutional sponsorship, which typically occurs on its larger moving averages. Investors should closely watch the price action between $8 and $7, as well as the stock’s reaction if it tests its EMA200 on its daily chart, considering setting a stop loss as a last resort slightly below. of this trailing moving average.

The stock is building positive momentum, but a possible continuation of the uptrend could likely be affected by several pullbacks and retests of recent resistance levels. Investors can trade this stock within the defined range, which can offer nice short-term returns, or allow it to hover with more tolerance towards higher volatility. Investors should closely observe the price action and behavior of the stock at the mentioned crucial support levels, and how a possible attempt to overcome its resistance is confirmed or rejected, especially observing the trading volume in both meaning.

More risk-averse investors might consider a risk-reward ratio of 2 by setting their stop-loss slightly below the EMA50 with a target set at $9.80. Investors with higher risk tolerance could instead give the stock’s volatility more room and set their stop-loss below the 200 EMA, with the ultimate support level seen at $6.97. As a breakout towards these levels could carry the risk of seeing even more losses, I would definitely not hold the stock anymore.

The bottom line

Technical analysis is not an absolute instrument, but a means of increasing the probability of success for investors and a tool allowing them to orient themselves on any value. You wouldn’t drive to an unknown destination without consulting a map or using a GPS. I believe the same should be true when making investment decisions. I consider techniques based on Elliott Wave Theory, as well as probable outcomes based on Fibonacci principles, confirming the likelihood of an outcome contingent on time-based probabilities. The purpose of my technical analysis is to confirm or refute an entry point in the stock, by observing its sector and industry, and especially its price action. I then analyze the situation of this stock and calculate the probable results based on the theories mentioned.

GEO Group has plenty of evidence that indicates the stock has technically reversed and after a long and severe losing streak, it may now be forming its next uptrend. Although the stock has lagged over the past five years, the company has many top institutional investors among its shareholders, together holding more than 75% of the share capital. Fidelity has massively increased its position since Q2 2021 until own 13% of shares outstanding, BlackRock (NYSE:noir) owns about 14%, and investors Michael Burry, through his company Scion Asset Management, said holding 501,360 shares valued at more than $3.3 million as its only holding at the end of the second quarter. Despite recent positive developments, GEO still has a relatively high level short interest of 17.20%, although this measure has fallen more than 50% since May 2021. The stock offers a favorable technical picture for momentum and position traders with significant upside potential, while its downside risk is limited by several levels of support. I therefore rate this stock as a buy from the perspective given.