Over the last six months, H&R Block’s shares have sunk to $38.02, producing a disappointing 9.6% loss - a stark contrast to the S&P 500’s 11% gain. This might have investors contemplating their next move.

Is there a buying opportunity in H&R Block, or does it present a risk to your portfolio? Get the full stock story straight from our expert analysts, it’s free.

Why Do We Think H&R Block Will Underperform?

Even with the cheaper entry price, we don’t have much confidence in H&R Block. Here are three reasons we avoid HRB, plus one stock we’d rather own.

1. Revenue Spiraling Downwards

A company’s long-term sales performance is one signal of its overall quality. Any business can put up a good quarter or two, but the best consistently grow over the long haul. H&R Block’s demand was weak over the last five years as its sales fell at a 2.1% annual rate. This wasn’t a great result and is a sign of poor business quality. We note H&R Block is a seasonal business because it generates most of its revenue during tax season, so the charts in our report will look a bit lumpy.

2. EPS Barely Growing

We track the long-term change in earnings per share (EPS) because it highlights whether a company’s growth is profitable.

H&R Block’s EPS grew at 8.8% compounded annual growth rate over the last five years. On the bright side, this performance was better than its 2.1% annualized revenue declines and tells us management adapted its cost structure in response to a challenging demand environment.

3. New Investments Fail to Bear Fruit as ROIC Declines

We like to invest in businesses with high returns, but the trend in a company’s ROIC can also be an early indicator of future business quality.

We like to invest in businesses with high returns, but the trend in a company’s ROIC is what often surprises the market and moves the stock price. Over the last few years, H&R Block’s ROIC averaged 1.8 percentage point decreases each year. We like what management has done in the past, but its declining returns are perhaps a symptom of fewer profitable growth opportunities.

Final Judgment

H&R Block doesn’t pass our quality test. Following the recent decline, the stock trades at $38.02 per share (or a forward price-to-sales ratio of 1.2×). The market typically values companies like H&R Block based on their anticipated profits for the next 12 months, but there aren’t enough published estimates to arrive at a reliable number. You should avoid this stock for now - better opportunities lie elsewhere. We’d recommend looking at one of our top digital advertising picks.

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