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Auditing the Prospects for H&R Block, Inc., By the Numbers

This tax preparer looks poised to turn lower during the near term

by 4/15/2010 2:00:25 PM
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Yeah, OK, so we're covering H&R Block, Inc. (HRB) on Tax Day. You can accuse us of being obvious, or of being lazy and unimaginative, and you can even accuse us of pandering. Go ahead; it's nothing our mothers haven't said to us recently, anyway.

All kidding aside, though, HRB did appear on our radar this week for the most obvious of reasons. But once we took a closer look, we uncovered some compelling contrarian prospects for one of America's best-known tax preparers.

This is probably a bad sign

First of all, we have to get this out of the way: We just found a bullish article on HRB over at Forbes, and the title is "Hold Your Nose and Buy H&R Block." The piece goes on to say, "H&R Block... may be so battered that it's a great value stock." We're not quite sure, but we think this is what people mean when they say "damning with faint praise."

Of course, we certainly respect the opinions of our friends at Forbes -- and for some investors, HRB could be a totally respectable and appropriate long-term prospect. However, from our perspective as aggressive, short-term options traders, we view this article as one more piece of evidence in favor of the contrarian bearish case.

Unpleasant price action is just the beginning

As noted by the aforementioned article, HRB shares have been more or less hammered in 2010. In late February, the stock gapped dramatically lower after the tax preparer warned that it wouldn't be able to meet its 2010 earnings guidance. So, while the broader S&P 500 Index (SPX) has racked up a respectable year-to-date gain, HRB has shed roughly 20% of its value during this time frame.

Year-to-Date Price Change for HRB and SPX

In fact, HRB has lagged the SPX by a noteworthy 25 percentage points during the past 60 sessions. The shares aren't exactly oversold, either -- thanks to a minor rebound, the equity's Relative Strength Index (RSI) stands at a middling 56.

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