Dear Mr. Berko:

I’m considering investing $4,000 in H&R Block and in Pre-Paid Legal Services because I think both are good long-term growth companies and provide services that continue to grow in need. Taxes and tax preparation are becoming more complicated and expensive, and legal services are so necessary (you can be sued for sneezing in public) and so expensive, too.

Both of these companies do their jobs well and for much less than their private competitors. I think the big law firms and accounting firms play only to the wealthy. The small guy can’t afford the costs, so these two firms are the best options. Please give me your opinion of these two companies and tell me if my thinking is right.

W.L., Aurora, Ill.

Dear W.L.:

Our nation’s tax returns (the pages of papers we fill out) are designed by our nation’s tax preparers just as our nation’s laws are written by our lawyers. Both are constructed with a single-minded purpose: to create an activity so complex, so confusing, so convoluted and so inscrutable that the individual has no choice but to employ a professional to complete a tax return or file a legal action.

The collusion and collaboration between the two professions is tighter than bark on a tree. Oh, the simple stuff (individual returns) is easy, but if you’re a small employer, pay a decent wage and provide a 401(k), profit-sharing or pension plan and a few other deserved benefits, you’ll need heaven’s help to complete the paperwork. If you really want a perfectly elegant example of attorney/accountant back-scratching, read the Economic Growth and Tax Relief Reconciliation Act. A complete copy of this blather would give a hernia to a camel that was carrying it from the House to the Senate.

So H&R Block (HRB-$37.46) to the rescue. A $3.8 billion revenue firm that prepared 17 million returns in 2002, constituting 14 percent of all individual returns prepared, HRB is also a retail business brokerage, has a business service (National Accounting Practice) and is active in home mortgages. HRB, certainly not a blue-chip, white-shoe firm like Arthur Andersen, does a darn good job with business and personal returns, the prices are fair and the work is thorough and completed on time.

As our tax returns and tax laws become more complicated, I expect that HRB, whose revenues have increased almost fivefold since 1987, will experience similar revenue growth. In the coming decade, HRB is expected to earn $3.30 a share in 2003, which puts the share price at a low 11.4 times expected earnings. The company has a market cap of $6.7 billion, and Charles Clark of Value Line believes HRB could trade between $70 and $90 within the coming four years. HRB is a pure play that could give you some nice pure profits in the near future. So buy 100 shares.

Pre-Paid Legal Services (PPD-$17) started out as an itsy-bitsy little firm with big-league intentions. Revenues in 1990 were $12 million and have increased annually to $303 million last year; that’s a 25-fold increase.

According to the National Resource Center for Consumers of Legal Services, 128 million Americans were entitled to service via a legal-services plan in 2002, versus 3 million in 1980. But more than 50 percent of them are members of “free plans” that provide very limited benefits.

PPD is sort of like a health maintenance organization for the legal profession. The company markets memberships on a closed-panel basis: Members are entitled to service from specific firms or independent attorneys who contract with PPD. Its 1.4 million members get unlimited toll-free phone access to an attorney, document review, letter-writing if necessary, automobile legal protection, defense of civil or job-related criminal charges, Internal Revenue Service audit protection services, trial defense and other benefits. Non-stipulated services will be rendered at a discount to the usual fee.

PPD has zero debt, the stock trades at 10 times current per-share earnings of $1.68 and only eight times 2003 earnings of $2.04. There are only 19 million shares out, strong cash flow, growing revenues and earnings, and the stock could reach $30-$35 a share in two to three years. Go ahead and buy 200 shares.

Please address your financial questions to Malcolm Berko, P.O. Box 1416, Boca Raton, Fla. 33429 or visit his Web site at www.berkoradio.com.