TAX: The Only Thing That Grows Without Rain (HRB)

No time for messin’ – gotta get the Lord’s blessin’!

We’re rockin’ the Casbah this morning with another finely-tuned option gold-mine from the promised land, Eretz Yisrael.

G-d bless all you good Jews and Noahides with briut and parnassa, and let nary a’one of you lose that blessing ad 120.

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Today’s trade has a profit potential of 1900% and is based on the fortunes of H&R Block (NYSE:HRB), those who steal a portion of your hard-earned money while its on its way to those who steal an even greater portion.

The company recently beat estimates and saw a number of Wall Street analysts raise their coming quarter and full year estimates on the stock, a development we say doesn’t jibe with all we see in the tax preparation world and beyond.

Consider the fundamentals –

• After a climb of almost 60% in three weeks, the stock trades with a P/E of 30.10.  And no, this is not a growth stock.
• The dividend is handsome, now offering 3.01% annually, but
• Price to Book is a bit taxed at 128.36 (!).
• Most disturbing, though, is full year earnings, which are DOWN 84.20% from last year, and
• Are expected to decline ANOTHER 9.01% next year, based on analyst consensus.
• EPS over the last five years are DOWN 24.20%, and
• Top-line sales are also DOWN 31.30% over the same period.

What we had here, essentially, was a single quarter of Q/Q outperformance from a stock that has gone nowhere, and provided zero capital gain in some eight years.

Yes, they now offer an online banking platform, but it’s unproven, and goodness knows whether it will be a drain on resources or a boon.

Now look at the chart –

1. We have sustained superior buying on a relative basis for nearly a month now (in green), even though
2. MACD is now rolling over and volumes have dropped precipitously for two solid weeks (in black).  All of which points to an coming break in momentum – if it hasn’t already occurred.
3. Price is also in the middle of a fast-forming rising wedge (in purple), always a bearish pattern, and
4. Last Friday, a gravestone doji (enlarged, in black) appeared at the highs, giving us further reason to initiate against these blockheads ASAP.
5. The stock is currently cruising 50% above its mid- and long-term moving averages and a gap in the $24.50 range that may have to be filled (in blue).  Technicians far and wide will be looking toward that level as a potential intermediate-term downside target for the stock.

But we don’t need that big of a decline to score.

Our full 1900% is delivered with just a modest pullback.

Have a look –

A Jew and His Money recommends you consider selling the HRB July 15^th 35/37 CALL spread* for a credit of $0.85 (2.10/1.25) and buying the HRB July 15^th 36/34 PUT spread** for $0.95 (1.95/1.00).  Total debit on the trade is $0.10.

[*Sell the 35 CALL and buy the 37 CALL.  **Buy the 36 PUT and sell the 34 PUT.]

Rationale: it always feels good to pull in $1.90 NET on just a dime laid out (1900%).

And nice, too, when the downside is limited to $2.10 (the difference between the CALL strikes plus the initial debit).

Breakeven arrives at $35.40, a mere 54 cents below Friday’s close (or 1.5%).

Giants came before us, good Jews and Noahides – all our Avot and Imahot.

May their merit protect us always.

!זכותם יגנו עלינו

With kind regards,

Hugh L. O’Haynew

Follow @HughLOHaynew