H&R Block (NYSE:HRB) prepared over 21.6 million U.S. tax returns in fiscal 2021. With more than 9000 offices across the country and annual revenue exceeding $3B, it is the largest tax-prep company in the world.
Alas, accounting and tax preparation is a mature industry with little growth runway. As a result, HRB stock tends to move as slow as the underlying business.
The company’s overall results don’t change substantially year after year. The market reflects this in such a way that HRB currently trades at the same level it did in 2003. So if capital appreciation is what you’re looking for, H&R Block is probably not for you. Most investors buying this name are after its steady and predictable dividend.
But even accounting can be exciting if you look at it from a different angle. True, HRB stock is little changed over the past 20 years. Those two decades, however, actually included some wild swings.
In 2010, it fell to $10. Then it surged to $37 in 2015. During the March 2020 crash, the shares barely held above $11. If the company is hardly changing, how come the stock is so volatile?
A look at HRB stock from an Elliott Wave perspective
The answer has little to do with the company itself and everything to do with the emotions of the investing public. The optimists send prices higher by buying. The pessimists push it lower by selling.
Since H&R Block’s intrinsic business value is pretty static, we need something else to help us explain—and prepare for—the stock’s wide fluctuations. We’ve found that Elliott Wave analysis can fill that void.
The chart above visualizes HRB stock’s recovery from the 2020 bottom at $11.29. The price is up 138% to $26.92 in a little over two years. What interests us, though, is the fact that this impressive rally can be seen as a five-wave impulse.
The pattern is labeled 1-2-3-4-5, where the five sub-waves of wave 3 are visible, as well. Also note that the impulse fits nicely within the parallel lines of a trend channel. Wave 4 retraces almost exactly to the 38.2% Fibonacci level.
All this gives us confidence that HRB is currently in its fifth and final waves. Unfortunately for the bulls, a three-wave correction follows every impulsive sequence. So, instead of extrapolating the recent past into the future, investors would be better off adopting a more defensive attitude.
The anticipated decline has the potential to erase the entire wave 5 and drag HRB stock down to ~$20 a share. This means the company can lose a quarter of its valuation before the uptrend can resume. We’d rather watch from a safe distance.