Because of the Affordable Care Act — commonly known as “Obamacare” — the tax season is likely to be a boon for tax preparers and tax software providers like H & R Block Inc (NYSE:HRB), Liberty Tax Inc (NASDAQ:TAX) and Intuit Inc. (NASDAQ:INTU).
So is there still an opportunity for investors? I think so, at least for a short-term trade.
But first let’s take a look at why Obamacare is likely to supercharge for tax preparers and tax software companies. First of all, taxpayers will have to deal with three new tax forms, which are far from easy to fill out. They deal with such matters as determining the amount of credit a taxpayer can receive for insurance payments, potential penalties for being uninsured and claims for an exemption. Indeed, there are more than 30 new possible exemptions!
Based on research from HRB, it looks like these complications could affect anywhere from 25 million to 30 million people.
At the same time, the IRS will likely not be helpful in dealing with the confusion. According to IRS Commissioner John Koskinen: “Use our phone lines only as a last resort.” In fact, the agency believes it will only be able to handle half of the expected volume of inquires. So yes, taxpayers will probably get better results by contacting tax preparers and tax software companies like HRB, TAX and INTU, which have been gearing up for the complexities of Obamacare.
To this end, HRB, TAX and INTU have been aggressive with their advertising and have also opened their offices earlier in the tax season, providing special programs for advice. They have also been offering enrollment services, which should add some extra revenues. Keep in mind that TAX currently has more than 1,300 licensed insurance agents to handle the demand.
Tax Software Stocks Will See a Boost
Yet even without the impact of Obamacare, the tax season was expected to be strong for tax preparers and tax software companies. The main reason: substantial growth U.S. employment. The result is likely to be about 3 million more people who will need to file tax returns.
OK, so which of the tax preparers and tax software companies look attractive for investors? Well, let’s start with the one that will have the least impact from Obamacare: INTU. Of course, tax software is only a portion of the company’s revenues, which also includes segments like Quicken, QuickBooks and Mint. Besides, given the complexity of Obamacare, taxpayers may prefer want to go to a brick-and-mortar operator like TAX and HRB to get advice from someone who is trained in tax preparation.
So between TAX stock and HRB stock, which is better? It really depends on your risk level. The more volatile option would be TAX since it is a much smaller company, with revenues of $150 million. HRB stock, on the other hand, has revenues of nearly $3 billion and even pays a dividend with a yield of 2.3%.
Both HRB and TAX are trading at reasonable valuations, with forward price-to-earnings ratios of about 16.
But regardless of which one looks more promising, the fact is that Obamacare represents the biggest change in the tax code in over two decades and this should mean a boost in business for the tax preparers and tax software companies.
In fact, they are likely to be nice plays for traders if the markets continue to be volatile, as seen yet again in today’s tough trading.
Tom Taulli runs the InvestorPlace blog IPO Playbook. He is also the author of High-Profit IPO Strategies, All About Commodities and All About Short Selling. Follow him on Twitter at @ttaulli. As of this writing, he did not hold a position in any of the aforementioned securities.
