This week we learned that Quicken Loans will officially change its name to Rocket Mortgage (NYSE:RKT). If it’s good enough for them to commit to that change, then it’s good for me to buy RKT stock.
That was the spoiler alert for you. At these levels this is a stock that I would invest in for the long term. Taking the lending process completely online fits with the global digitization trends.
The mortgage market has been on fire for a long time. This is thanks to very loose monetary conditions from the Federal Reserve. Fed Chair Jerome Powell extended his commitment to their ZIRP until 2023. Some doubt in that surfaced recently from tangible inflation finally showing up in the CPI reports. Nevertheless, for now, it’s low rates for a long time policy.
The recovery out of the real estate 2008 disaster has been phenomenal. Houses have never been more expensive almost everywhere in the U.S. If you ask mortgage professionals, they can confirm that they are very busy. The slide in RKT stock is puzzling because they are doing well in home lending and other segments they operate.
RKT Stock Had Its Day in the Sun Already
The company is not that new, but it is new to Wall Street. It has already had a couple of extremely bright shining moments. Early in its IPO career, the stock rocketed to $34 per share before crashing back down to base. Then it spent the rest of the year consolidating. That established a strong floor for another catapult toss up in March. The first spike in September was impressive, but the second was 25% bigger.
Sadly, for those who bought in late at $43, they are now down 61% on their investment. Not only did RKT stock fall back to base, it lost its footing there and went 20% deeper. The reaction to the earnings report was disappointing to say the least. Investors did not like what they saw.
Most often this is due to unrealistic expectations rather than bad results. In this case, management failed to wow Wall Street with big beats. But most importantly they served up a disappointing forecast. That was a double whammy and the stock could not withstand the shock.
This, however, does not change the fact that the company has a healthy business. Eventually investors will realize it and stop selling the stock. Finding value now is difficult because its fundamentals are still too young. These are usually the justifications to catch the falling knife. I try to look beyond the digits sometimes and use logic. There I deem it a no-brainer, which worries me a little bit. Anytime I think I have an easy win, I find out that I was missing a puzzle piece.
It’s Too Late to Panic
Someone who is long the stock already is probably too late panicking out of it now. RKT stock near $16 per share makes for a better bullish bet than a sell at this point. When catching a falling knife that is making new lows, we put a lot of faith forward. There is no concrete support level, so the risk size needs to be appropriately low.
This is where it’s also good to use the options markets where we can use leverage. Instead of buying shares out right at $16 I can lower my risk considerably by selling puts instead. Then I would not even need a rally to win. Gut says that soon this selling jag will abate and investors will figure out the value.
I don’t expect a sharp rally like what happened in March, but it sure would be nice if it happens. The plan is to hold this stock for the long term, long enough for it to develop reliable metrics. Then the Wall Street experts can have concrete evidence. As it is, the analysts who cover RKT stock are mostly in a hold pattern. Yet their average price target is almost $22 per share.
Their ratings system is puzzling to us regular folks. Listening to them is definitely not a guiding light for my investments. I’d rather use common sense, do my own homework and arrive at a decision. The upside potential outweighs the downside risk in RKT stock from these record low levels.
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.
