Below Its $18 IPO Price, Rocket Companies Is an Excellent Contrarian Bet

Mortgage originator Rocket Companies (NYSE:RKT) is currently in the middle of what can only be described as a major trading slump. Since May 5, RKT stock is down nearly 25%.

The logo for Rocket Companies displayed on a smartphone screen (RKT).

Source: Lori Butcher / Shutterstock.com

Rocket’s stock hasn’t traded this low since it went public at $18 in August 2020. The fact that its initial public offering (IPO) priced two dollars below the bottom end of its $20 to $22 pre-IPO pricing should have been all that investors needed to know about the future direction of its share price.

As I write this almost 10 months later, it’s trading slightly above $17. You can pick it up for less than IPO investors paid for their shares.

InvestorPlace’s Larry Ramer recently discussed why investors should avoid RKT stock. While I understand my colleague’s concerns, I think there is a contrarian point of view to be had when it comes to Rocket.

After falling as much as it has in recent weeks, it’s possible that several of the potential headwinds faced by Rocket and the housing market might not materialize. If you’re a risk-taker, here’s why now may be the absolute best time to buy RKT stock.

Is RKT Stock Ready to Liftoff?

The headwinds that my colleague mentions in his article include rising inflation, higher interest rates, lower housing starts, material shortages, and the migration of Americans to the suburbs. They are listed in no particular order of consequence.

I just wanted to lay out the fact, as my colleague sees it, that the current economic environment isn’t a slam dunk for Rocket to grow its business over the next 12-24 months.

There are potential risks here. If there weren’t, it wouldn’t have dropped 25% as quickly as it did. Remember, the markets are a barometer of what will happen six months or a year from now, not what’s happening currently.

Of the concerns brought up by Ramer, clearly, higher interest rates are the one most investors will focus their attention on. As Larry pointed out, Baron Funds got out of its position in RKT because it couldn’t justify holding the growth stock into a higher-interest-rate environment.

Another InvestorPlace contributor, Mark Hake, said in late April that rising interest rates could lead to a crash for Rocket. Since Hake made this assumption, RKT stock is down 20%.

But what if they’re wrong? What if inflation dies, shortages fall away, housing starts rise and interest rates remain historically low? Rocket takes off like it did in early March.

What Happened in March?

That’s a good question. It’s been a while since I’ve considered Rocket’s stock. The last time I discussed RKT was in September 2020. I recommended it along with nine other new stocks I thought were worth considering for your portfolio.

At the beginning of March, thanks in large part to the Reddit short-squeeze craze, Rocket’s stock gained 75% in a single day. Unlike GameStop (NYSE:GME), it’s been unable to hang on to much of its Reddit-inspired gains.

And now that investors are getting nervous about interest rates, all bets on the stock appear to be off. At the time of the short-squeeze in early March, Rocket’s short interest was 47.9 million shares. That was almost 46% of the public float at the time.

Where is it today?

Well, according to MarketWatch, Rocket’s short interest, as of May 14 was 19.36 million shares, or 15% of its public float. That’s a third of what it was in early March.

You might think that’s a bad thing, given how much gas is added to the fire from a short squeeze, but it’s not. Investors are spending too much time reading the tea leaves when it comes to Rocket.

As long as a shortage of houses exists — according to Freddie Mac, 3.8 million homes need to be built today to meet the country’s demand — there’s going to be a commensurate need for large mortgage lenders such as Rocket.

Unless you’re Rockefeller (or a real estate investor), you’re probably going to need a mortgage to finance the purchase. Higher interest rates might discourage some people from buying, but the reality is most people buy homes for lifestyle reasons, not because they can get a dirt-cheap mortgage rate.

If that weren’t the case, nobody would have bought homes in 1981, when the average mortgage rate was 16.64%. According to the American Enterprise Institute, existing-home sales fell by 50% between 1978 and 1981. But that still meant two million existing homes were sold that year, many of the buyers ponying up cash from a 17% mortgage. New home sales fell by a similar amount.

So, yes, higher interest rates may cut down the demand for mortgages. But to the level of 1981? Not a chance.

The Bottom Line on RKT Stock

In Rocket’s Q1 2021 conference call, CEO Jay Farner discussed how interest rates affect its overall business.

“Although rate and term refinancing activity was very high in 2020’s low interest rate environment, Rocket has historically had a balanced mix of originations,” Farner stated.

“For example, over the last four years, including 2020, half of our cumulative volume was from these less rate-sensitive products.”

I urge you to read his comments. It might not change your mind, but at least it will make you consider the other side of the argument.

We’ve had low interest rates for so long; it’s become impossible for investors to imagine a business thriving in a higher-interest-rate environment. But they can and will with proper foresight and planning.

Is RKT stock risk-free at $17? Of course not. It’s a lot more attractive, though, at current prices than at $41.

If you’re a speculative investor, I wouldn’t hesitate to bet on Rocket in the teens.

On the date of publication, Will Ashworth did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.

Will Ashworth has written about investments full-time since 2008. Publications where he’s appeared include InvestorPlace, The Motley Fool Canada, Investopedia, Kiplinger, and several others in both the U.S. and Canada. He particularly enjoys creating model portfolios that stand the test of time. He lives in Halifax, Nova Scotia. At the time of this writing Will Ashworth did not hold a position in any of the aforementioned securities.


Article printed from InvestorPlace Media, https://investorplace.com/2021/05/below-its-18-ipo-price-rocket-companies-rkt-stock-is-an-excellent-contrarian-bet/.

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