Rocket Mortgage (NYSE:RKT) is a fairly new stock but it has already gained a lot of fans among the trading community. Rocket stock has quickly proven itself as an exciting trading vehicle. Today we will make the argument that it also makes for a good long run investment.
Since it is still so young it doesn’t have any fundamental metrics, so the thesis is easy. Buy it for the long term because the upside potential is larger than the downside risk. We don’t have many guides for Rocket but we can borrow from its industry.
Thanks to central banks keeping rates near zero it has been cheap to transact in real estate. Borrowing costs have never been lower or for this long. This is an environment conducive for a company like Rocket to flourish. There will be demand for its services for years to come. The U.S. Federal Reserve has dug itself a hole where it needs to suppress rates for decades. Moreover, the quarantine benefited RKT because everyone is using online processes. That plays directly into its hand.
Thanks to the stringent lending rules after the 2008 crash, the loan-to-values now are still low. This means that the refinancing activity will also remain high for as long as rates are low. People love to use home equity as an ATM machine for big ticket spending like buying cars or installing pools. Either way, RKT stock will benefit from that.
RKT Stock Chart Shows Support Below and Opportunity Above
Technically there are reasons to expect that the recent 30% correction is an opportunity to buy the dip. In its early IPO days, RKT stock came out of the box screening up 50% in hours. It immediately reverted 30% lower from that high. Then out of nowhere it rallied almost 100% to its high near $34 per share.
We already said that this is a momentum stock so it moves fast in both directions. In under two months of existence it has already experienced at least six rallies larger than 10% in both directions. Most were more than 30%.
It now sits just below the midpoint of the entire range, and just above the most recent support level. From its wild range I can pick $25 and $22 per share as two important short term levels. The bulls can assume that there is support between $21 and $22 per share. Furthermore, they can also assume that if they can break above $26, then buyers will chase the momentum higher. Weather Rocket stock recovers its highs now or in 12 months is unclear. But the point is to take advantage of the opportunity that exists for the next few years.
Current Economic Conditions Are a Short Term Factor
While stocks have recovered from the quarantine bottom, the economy has not. We still have millions of Americans out of work and GDP is shrinking. Consequently, it is important to acknowledge that there is risk to Rocket stock to no fault of its own. If the markets overall correct, Rocket will too. We just saw a 10% drop in mere hours and this could be just the beginning.
Regardless of how good the micro economic conditions are for RKT, it has to trade within a terrible macro environment. Investors can use options to build a buffer in case the malaise on Wall Street persists.
For example, an investor can sell the Rocket $21 October 30 put and collect almost $2 for it. This puts them long the stock now without a need to rally to profit. If the price stays above $21 then they would win the equivalent of an 8% rally from $23. The breakeven for that is around $19 per share.
Compare this with buying the shares now and leaving absolutely no room for error. If price falls to $20 then the investors would have lost 13% already. Whereas someone who sold the $21 put would still have profits on their hands. Selling puts commits the investor to buying the shares at that price. Those who do not want to do that can sell a put spread instead. This would be an attempt to create income without any out-of-pocket expense.
In summary, Rocket stock has proven itself to be a fast mover. It has seen bad days, but long term it’s a buy.
On the date of publication, Nicolas Chahine did not have (either directly or indirectly) any positions in the securities mentioned in this article.
Nicolas Chahine is the managing director of SellSpreads.com.