We recently compiled a list of the 10 Cheap and High-Quality Stocks Picked by Former SAC Capital Analyst. In this article, we are going to take a look at where H&R Block, Inc. (NYSE:HRB) stands against the other cheap and high-quality stocks.
Jonathan Tepper, the chief investment officer of little-known hedge fund Prevatt Capital, has an interesting approach towards investing. Tepper, whose stock picks generally focus on quality and value of firms, believes that investors would be better served learning about the modern history of finance, as it relates to the rise and fall of big businesses as well as financial meltdowns, instead of being bogged down by economic theory based on mathematics that might not play out in the real world as it does in books. Tepper leads Prevatt Capital which had a 13F stock portfolio worth more than $296 million at the end of the first quarter of 2024.
Tepper is the author of The Myth of Capitalism, a book that dives deep into the public policy surrounding industrial concentration in the United States and the rise of powerful monopolies. Tepper, in a recent appearance on Capital Allocators with Ted Seides, a finance podcast, underlined that his investing thesis was based on his studies about powerful monopolies that were owned by investors he admired. Tepper noticed how a lot of these monopolies were businesses that, if they did not exist, somebody would have to invent them. He remarked that he thus learned to invest in firms that had a natural reason for existing.
His comments can be seen in action if we look at the latest financial disclosures of his hedge fund. More than 60% of the stock portfolio of Prevatt Capital is concentrated in the consumer goods and services sectors. Tepper has doubled down on many of his long bets, increasing stakes in four of the top ten stocks in the portfolio of Prevatt Capital during the first quarter of 2024. The total value of the 13F portfolio has increased by more than $25 million in the first three months of the year due to this buying activity, compared to the previous quarter. His top ten holdings comprise nearly 80% of the total portfolio.
There are several reasons why Tepper prefers the value-based long term investing approach of his mentors to create wealth, as opposed to the shorting strategy adopted by many other hedge fund managers on Wall Street. Some of the reasons include short squeezes, lots of hype around new firms, high borrowing costs, and several funds shorting the same firms. In contrast, a value-based approach creates wealth at a healthy pace and avoids permanent loss of capital or significant drawdowns. Buying quality firms also comes with the added benefit of strong cash flows, steady dividend payouts, and thoughtful share buybacks to increase value.
Our Methodology
For this article, we scanned the stock portfolio of Prevatt Capital according to the 13F filings submitted at the end of the first quarter of 2024. We selected the top 10 stocks from this portfolio. Why are we interested in the stocks that hedge funds pile into? The reason is simple: our research has shown that we can outperform the market by imitating the top stock picks of the best hedge funds. Our quarterly newsletter’s strategy selects 14 small-cap and large-cap stocks every quarter and has returned 275% since May 2014, beating its benchmark by 150 percentage points (see more details here).
An experienced tax accountant reviewing paper work on their desk.
H&R Block, Inc. (NYSE:HRB)
Number of Hedge Fund Holders: 26
Prevatt Capital’s Stake: $22,590,600
H&R Block, Inc. (NYSE:HRB) is seventh on our list of top stock picks of Prevatt Capital. The firm provides assisted income tax return preparation and tax return preparation services to the general public. In early May, H&R Block, Inc. (NYSE:HRB) posted earnings for the third quarter of 2024, reporting earnings per share of $4.94. The revenue over the period was $2.2 billion, up 4% compared to the revenue over the same period last year. The firm derives value from stable revenues, a strong dividend yield, and efficient equity utilization, despite having a somewhat higher leverage.
The following metrics reflect the wide competitive moat of the firm. H&R Block, Inc. (NYSE:HRB) has a Price-to-Earnings (PE) ratio of around 12, lower than the industry average and highlighting the undervalued nature of the stock. It has an unblemished payout history and offers a strong dividend yield of 3.6%, making the stock attractive for investors who value passive income. Despite a high debt-to-equity ratio, the stable cash flows of the firm suggest it can manage to bring this ratio down in the coming months. H&R Block, Inc. (NYSE:HRB) prepares around 12 million tax returns annually in the US, 6 million of which are online.
In its Q3 2023 investor letter, Artisan Partners, an asset management firm, highlighted a few stocks and H&R Block, Inc. (NYSE:HRB) was one of them. Here is what the fund said:
“In the consumer discretionary sector, tax preparer H&R Block, Inc. (NYSE:HRB) was a winner. Revenues contracted in the recent quarter but were better than expected, sending shares higher. Revenue growth was held back by lighter US industry tax filing volumes during the 2023 tax season, due in part to a year-over-year normalization of stimulus filers, in addition to market share losses in the assisted category. Some share losses are due to competition, but also a factor is a continued shift among filers to HRB’s cheaper DIY (do-it-yourself) option. While recent growth has been disappointing, HRB remains a dominant provider in assisted tax prep, a cash cow that is a relatively predictable, non-cyclical business. Prodigious cash flow continues to be faithfully returned to shareholders via dividends and share buybacks. Further, expectations remain muted as shares trade for less than 10X FY24 earnings.”
Overall HRB ranks 7th on our list of the cheap and high-quality stocks picked by former SAC Capital Analyst Jonathan Tepper. You can visit 10 Cheap and High-Quality Stocks Picked by Former SAC Capital Analyst to see the other cheap and high-quality stocks that are on hedge funds’ radar. While we acknowledge the potential of HRB as an investment, our conviction lies in the belief that AI stocks hold greater promise for delivering higher returns, and doing so within a shorter timeframe. If you are looking for an AI stock that is more promising than HRB but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
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Disclosure: None. This article is originally published at Insider Monkey.
