The private prison industry, which has faced tough government scrutiny, a declining inmate population and a drawdown of federal contracts under the Obama administration, is seeing a reversal of fortune due to the election of Donald Trump.

Private prisons were found to be more dangerous than government-run facilities in an August report by the inspector general of the Justice Department, prompting the agency to announce it would begin phasing out those contracts. Stock prices plunged for the two biggest contractors, GEO Group...