H&R Block Swaps Suggest a Bounce is Near

H&R Block (HRB Quote) shares may be due for a bounce, if credit trends have anything to say about it.

The tax preparer, which last year sold off its mortgage business to investor Wilbur Ross and its financial advisory unit to former American Express (AXP Quote) subsidiary Ameriprise Financial (AMP Quote), reached a new eight-year low of $13.73 earlier this month. However, credit default swaps, which insure against a default by the company, have been getting cheaper, according to a research report from Tradition Asiel Securities. That suggests the credit markets see H&R Block as less likely to default on its debt.

"Typically these type of CDS-stock disconnects are not sustainable indefinitely," the report states. "We expect the stock market to show more confidence in [H&R Block], re-rating the stock higher once the credit positives are fully discounted in to the stock. Further current [H&R Block] valuation of 9.5x earnings look little hindrance to stock upside."

Technicals aside, investors considering H&R Block will have to reckon with the fact that more people are using do-it-yourself software to save money on taxes. While the downturn has probably accelerated this trend, it is logical to assume that once people have figured out how to avoid a big tax preparation fee, they will not be eager to cough it up again even if their paychecks get fatter.