8 Cheap Stocks With Price Momentum

ABOUT FIVE MONTHS AGO I made a case for dividing America's tax code into two stacks of pages. One, consisting of just a few pages, would describe a simpler version of the tax we already pay on income, dividends and capital gains (and on corporate profits once they're distributed as one of these things). The other stack, some five feet high, would hold pages that mostly don't describe a tax, and thus, don't belong in the tax code. The bulk of these pages describe hidden spending programs.

Worthwhile programs, like one that tops off the incomes of the working poor, should be replaced with direct spending, and thus subjected to the yearly scrutiny of the budget debate. Well-meaning but misguided programs should be fixed along the way; the largest makes workers dangerously dependent on their jobs by routing healthcare tax credits through employers. Programs that are beyond the role of government or that do harm -- like the incentives to buy houses with borrowed money that surely aggravated the housing boom-and-bust -- should be scrapped, abruptly or gradually.

I wish I could report that my plan has captured the nation's attention and that lawmakers are working on it as we speak. (Maybe I should have given it a catchier name, like "Strip the Stack.") Alas, most recent comments I've heard on the tax, whether from lawmakers or presidential hopefuls, focus on why we hard-working Americans deserve a new credit here and deduction there. That is code for more hidden spending, since credits and deductions merely transfer wealth from all taxpayers to chosen ones. Here comes a taller stack.

Back to stock picking, then. H&R Block (HRB) shares, I can't help but notice, recently hit a new high price for the year, but still seem inexpensive relative to the profit the company is forecast to achieve. (I noted in the aforementioned essay that for each dollar Americans pay in tax they spend 25 cents figuring out how much, or little, to pay.) The company in recent years sought to diversify its income by selling mortgages, investments and bank accounts, an effort that produced two straight fiscal-year losses. H&R seems to be operating with increased clarity since Richard Breeden, a shareholder activist who won a board seat a year ago, became chairman and began replacing top executives. The company has discontinued its mortgage business and announced earlier this month that it will sell its investment advisory business to Ameriprise Financial (AMP) for $315 million in cash.

Encouragingly for investors, new management seems keen to focus on taxes. Sales of tax services, which account for two-thirds of H&R Block's revenue, surged 13% year-over-year during the fiscal fourth quarter ended April 30. Management says it's expanding the marketing and distribution for its TaxCut home preparation software. Business service revenue was flat during the fourth quarter, but a cost-cutting program is at least helping margins.

Net debt has fallen by $750 million in a year and stands at $441 million. Management recently increased the dividend to 60 cents a year from 57, good for a 2.4% annual yield. It also earmarked $2 billion, roughly a quarter of the company's market value, for share repurchases. The stock fetches 15 times this fiscal year's earnings forecast, which has steadily inched higher in recent months. Next fiscal year's earnings are expected to increase 15%.

H&R Block turned up recently on a search for stocks with strong price momentum and still-modest valuations. Have a look at all eight screen survivors if you like, or run your own search using SmartMoney's stock screener and the full list of criteria.

Also See:
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