The initial public offering of Rocket Companies (NYSE:RKT) earlier this month didn’t exactly set the world on fire. Debuting on the New York Stock Exchange at $18 a share, RKT stock briefly rose nearly 40% to just under $25 per share before falling back to $18.74.
After the company announced that it will deliver second-quarter earnings on Sept. 2, the stock popped more than 10% to nearly $24 a share.
Still, the consensus view is that RKT stock has unperformed following one of the largest and most-hyped IPOs of the year. But investors may want to reconsider Rocket Companies. As the parent company of Quicken Loans, the largest retail lender and biggest online mortgage lender in the U.S., Rocket Companies has a lot to recommend it.
Financial Services Firm vs. Tech Company
Rocket’s IPO was undercut largely because institutional investors disagreed with the company’s valuation and positioning. Wall Street felt that Rocket should be priced as a consumer or financial company rather than as a technology play, which is how billionaire founder Dan Gilbert likes to characterize the company he founded in 1985. The company is run almost entirely online and through an innovative app rather than a traditional retail branch system.
Initially, RKT stock was to be priced at between $20 and $22 a share. But after investors balked, the IPO price was lowered to $18 and the air was let out of the company’s public debut. Nevertheless, the stock listing raised $1.8 billion, which made it the third-biggest IPO of the year behind only Royalty Pharma (NASDAQ:RPRX), which raised $2.18 billion, and Warner Music Group (NASDAQ:WMG), which raised $1.93 billion.
And the IPO vaulted Gilbert’s net worth to $30 billion and placed him among the 40 richest people on the planet. Gilbert, who also owns the Cleveland Cavaliers in the NBA, retains a controlling interest with 79% of Rocket’s common stock.
A Strong Mortgage Market
Despite the global pandemic and downtrodden U.S. economy, Rocket actually went public at an opportune time. With interest rates at their lowest levels since the 2008 financial crisis, mortgage rates are extremely attractive at less than 3%. The low mortgage rates have prompted a wave of applications for new mortgages and to refinance existing mortgages, which is Rocket’s bread and butter.
While rates are now starting to creep up and dampen the party, this year has been good for Rocket and its flagship company, Quicken Loans.
In its filing with the Securities and Exchange Commission ahead of its IPO, Rocket Companies reported net revenues of $5.1 billion in 2019 and profits of $893.8 million. The company said it experienced record mortgage originations from March through June of this year, and company Chief Executive Officer Jay Farner said the company expects to close 100,000 mortgages across 50 states in August alone.
The fact that Rocket is established and profitable distinguishes it from many start-ups that IPO while still woefully unprofitable.
Acquisitions and Dividends
Just prior to the IPO, Gilbert stressed that Rocket is currently looking to acquire fintech companies that can help to further advance its mortgage lending technology. Quicken Loans’ Rocket Mortgage stands out for offering fast, online-based mortgage applications and refinancing services that consumers find easy and efficient to use. Rocket Companies also has a personal and automotive financing segment through the websites ForSaleByOwner.com and LowerMyBills.com that helps to diversify its business.
Although RKT stock has only been trading for less than a month, the company’s leadership has already hinted at a dividend for shareholders. CEO Jay Farner has said that a dividend is on the table due to the exceptionally strong year the company has had. A dividend should make Rocket stock even more attractive to potential investors.
The Bottom Line on RKT Stock
The mortgage industry is not without risk. Typically, the housing market moves up and down in lockstep with the economy. Times are tough right now. The risk of loan defaults is high. But despite the risk, RKT stock is worth the investment.
It’s a company that has been in business for 35 years, is profitable and has been capitalizing on the recent surge in new mortgages and refinances. It’s innovative approach and use of technology appeals to consumers.
RKT stock is still too new to have a lot of analyst coverage. But investors should pay attention to the company’s upcoming earnings report. If the second quarter turns out to be as strong or stronger than expected, it will be a good sign for Rocket’s future and will send the share price higher. Getting in on a solid company such as Rocket on the ground floor is an opportunity that doesn’t come along too often. Take advantage.
As of this writing, Joel Baglole owned RKT stock.
