Editor’s Note: We are providing an equity trade for conservative investors and a Call option trade for aggressive traders.

EQUITY TRADE INSTRUCTIONS

Symbol: HRB (NYSE)
Limit: Buy below $26
Holding Period: 5 months
Target Price: $31
Target Gain: 19.2%

CALL OPTION TRADE INSTRUCTIONS

Symbol: HRB190118C00025000
Limit: Buy below $2.50
Strike Price: $25
Expiration Date: January 18, 2019
Target Gain: 100%+

COMPANY DESCRIPTION                     

H&R Block, Inc., through its subsidiaries, provides assisted income tax return preparation, digital do-it-yourself (DIY) tax solutions, and other services and products related to income tax return preparation to the general public primarily in the United States, Canada, and Australia through a system of retail offices operated directly by the company or by franchisees. Link to company website.

TRADE RATIONALE       

HRB is one of only three companies in the entire S&P 500 Index that currently earns the highest possible score of 10 from my IDEAL Stock Rating System due to its low earnings multiple, high dividend yield, and improving net operating cash flow.

Two months ago, HRB released Q2 earnings that came in better than expected and increased its dividend payment. However, it also guided 3% lower for revenue in 2019 due to last December’s tax simplification bill that will result in the company closing 400 of its least profitable offices (out of 10,000), pushing its share price down from above $29 to below $23.

Since then, HRB recovered above $25 and is on the verge of breaking through its upper Bollinger Band. Combined with its strengthening RSI and improving MACD, the stock appears poised to break through resistance near $26.

Despite the store closings, HRB is still a very profitable business with an estimated EBITDA (earnings before interest, tax, depreciation, and amortization) margin of 25% for 2018. For that reason, it has been able to repurchase 25% of its outstanding shares over the past three years while also raising its dividend payment each year.

I view HRB as a conservative play on the recent shift in market sentiment away from momentum stocks towards value. In addition, its earnings stream is mostly impervious to the threat of trade wars and should be enhanced by the recent decline in unemployment in the U.S. to historically low levels.