Rocket Companies (NYSE:RKT) should present investors with a relatively simple proposition. If you believe that the housing market will remain robust, you’re a buyer of RKT stock. If you believe there will be a normalization or pull back, then you’re sitting out.
So far in 2021, it looks like the latter is occurring.
Rocket Companies is the parent company of Rocket Mortgage. It went public in 2020 via a traditional initial public offering. And despite pricing itself at $18, the stock climbed over 25% on its first day of trading. Yet as of this writing, RKT stock is sitting below the psychologically significant $20 mark.
The question this article will try to answer is whether this is an overreaction or a signal that the company may be facing more than just the paper hands of speculative investors.
Does RKT Stock Face the Worst of Both Worlds?
The worst case scenario for Rocket Companies is a normalization of the housing market while rising interest rates slow down the refinance market. And as my InvestorPlace colleague Vandita Jadeja points out that Rocket is beginning to face stiffer competition. Some of that competition, Jadeja rightfully notes will come from traditional banks who are ramping up their operations as part of the economic reopening.
This appears to be playing out in RKT stock which is down over 50% from its Reddit-fueled rally at the beginning of March. And although, the consensus price target for Rocket suggests an upside of nearly 25% , the stock garners two sell ratings.
Does Correlation Equal Causation?
When I’m looking at a stock that’s as stuck in neutral as Rocket is, I tend to look at the company’s competitors. In this case, I looked at UWM Holdings (NYSE:UWMC). What I saw was hard to ignore. In the past 30 days, UWMC stock is up just under 11% (10.8%). In that same time period, RKT stock is up a little under 14% (13.73%).
Then I took a look at the last 12 months, and I saw a similar correlation. UWMC stock is down 8.97%; RKT stock is down 10.75%. However, with statistics you must be careful to presume that correlation equals causation.
In this case, I think there is a case for causation. Specifically at the end of June, the moratorium on foreclosures and rent forbearance will end. While the amount of new listings is not supposed to approach the level of the housing crisis, it does bode well for buyers of both RKT and UWMC stocks.
The Case For Coincidence
However, Ian Bezek noted that a strong new housing market should work out better for UWM Holdings, which is more geared towards new mortgage applications. One reason for this may be that UWM is making a strong push to corner the market on mortgage brokers.
I’ve had the occasion to write about UWM twice in the last 90 days. UWM got in a very public spat with Rocket regarding the allegiance of its network of mortgage brokers. Specifically, I wrote that “UWM CEO Mat Ishbia announced that wholesale brokers who work with Rocket Companies or Fairway would no longer be able to work with UWM.”
And although there are conflicting reports, the math has worked out favorably for UWM. Yet, a move like this would tend to support a higher stock price for UWMC relative to RKT. And that’s not the case.
At the same time, a broad consensus is emerging that the new mortgage market may remain relatively strong, refinancing may weaken. That would suggest that RKT stock should be performing worse than UWMC.
The Final Word on Rocket Companies
For its part, Rocket Companies made the case that history paints a balanced picture of refinancing activity in both higher and lower interest rate environments. And as Will Ashworth noted, homeowners have shown themselves to be resilient in the face of higher interest rates.
I tend to agree with that assessment. Buying a first home or moving to a new home may be more driven by interest rates. However, homeowners have a variety of reasons to refinance.
That being said, the outlook for RKT stock is murky for a reason. And until there’s more clarity, it may be best to stay away from the stock.
On the date of publication, Chris Markoch 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.
Chris Markoch is a freelance financial copywriter who has been covering the market for seven years. He has been writing for Investor Place since 2019.