The Best Trade of Q1 2021

For the astute observer, 2020 was filled with tremendous trade opportunities with the market being slow to react to numerous developing narratives. The most egregious example of all was the COVID trade, where the market shrugged off the coronavirus pandemic ravaging numerous Chinese cities like Wuhan before finally taking a sudden plunge when the US started to lockdown. Another example is the slow reaction to massive fiscal stimulus. News outlets were reporting that a large fiscal stimulus bill was in consideration several weeks before being signed into law as the CARES act, yet the market only rebounded when the law was on the brink of finalization. A more recent example is the US government cyber attack, which was discussed in the news 5 days before cybersecurity stocks like CrowdStrike saw major price increases.

Knowing this, the intelligent investor should ask the question: "What's a developing 2021 narrative that I must get ahead of?" The best answer is the impending tax season which every trader in 2020 will be thinking of, and there were tens of millions of new traders in 2020.

Q12021's Big Trade

This year, with most of the world cooped up at home and many sports seasons paused (i.e. no sports betting), millions of people turned to stock trading for entertainment and a potential income source. In fact, TechRadar reported in June that Robinhood's userbase grew by a massive 30% since the start of the year to 13 million users. And this is only Robinhood's stats. Every other broker likely saw a large increase in new users and trading activity as well.

A massive influx of new traders in 2020 means a massive influx of people needing extra tax assistance in 2021.

How to trade the 2021 tax season?

One idea to get ahead of the 2021 tax season is to get early exposure to pure-play tax preparation companies and the two best companies for this are H&R Block ($HRB) and Intuit ($INTU). Between the two, HRB is more interesting.

Traders are more likely to turn to HRB for tax help than INTU. This is because trading taxes are best handled by a tax accountant since self-service tax software miss several important rules like wash sales or capital loss carryover.

While INTU focuses on self-service tax software like TurboTax, which is a type of product HRB offers as well, HRB's specialty is filing taxes for you. Traders are more likely to turn to HRB for tax help than INTU. This is because trading taxes are best handled by a tax accountant since self-service tax software miss several important rules like wash sales or capital loss carryover. If you miscategorize wash sales, expect to get a letter from the IRS. Forgetting to use capital losses from a prior year to offset this year's gains results in paying more taxes than you should.

There are other reasons for HRB being more interesting. HRB is a better pure-play tax preparation company than INTU; whilst HRB's suite of products is solely focused on tax preparation, INTU has a myriad of other products like QuickBooks and Mint which are not tax-related. HRB also has a much smaller market cap at 2.8B (vs INTU's 100B) with a lower P/E of 15.2 (vs INTU's 51.18 P/E). In other words, HRB is undervalued while INTU is overbought.

HRB company analysis

HRB has a stellar balance sheet despite COVID. Even though the company took on more debt earlier in the year as a precaution against COVID, it's clear that management expects a significant rebound and completed a $150 million share buyback in the last quarter while continuing to pay a huge dividend of 7% a year. According to Nasdaq.com, the wall street analyst consensus on HRB is a Buy with all firms giving it a $21 price target, 35% higher than HRB's current price of $15.52 per share. Over 97% of HRB's shares are owned by institutional investors.

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2020 has been one of the best years to trade the news and it'll be much the same going into 2021. To beat the market, you need to be several steps ahead of everyone else and the impending 2021 tax season is an attractive opportunity.