The outlook for Rocket Companies (NYSE:RKT) is highly dependent on the direction of interest rates. I explained this in my previous articles on April 22 and May 24, on RKT stock, where I discussed the company’s Gain on Sale (GOS) revenue line.
But here’s the good news: interest rates have been falling lately. That portends well for RKT stock, especially if it leads to more people refinancing their mortgages or an increase in first-time originations.
But here’s the catch. Analysts still don’t believe that this will happen. That’s too bad since anyone can see that the 10 year Treasury yields have been falling for the past several months.
What Is Going On With Rates
For example, go to the Yahoo! Finance site for the NY Board of Trade 1o-year Treasury yields under symbol ^TXN. This shows that on March 30, the 10-year yields peaked at a closing high of 1.746%, but closed Friday at 1.209%. And that is not far above where they started 2021 at just below 1%. Moreover, since the end of June rates have fallen from 1.48% to 1.2%. These rates have a huge influence on mortgage rates.
Even more to the point look at this set of charts on Freddie Mac’s website. It shows that 30-year fixed-rate mortgage (30Y FRM) rates have fallen from a peak of 3.18% in the U.S. to 2.88% as of July 15. Moreover, you can clearly see that the trend is slowly falling for these 30Y FRMs. For example, since June 3 the rates have dropped from 2.99% to 2.88% as of July 15.
That is good news for a pickup in refinancings. But it may not show up in the Rocket Companies’ second-quarter numbers. That is what analysts are worried about. But what does that matter, if the Q3 numbers start to show that expected pick up in mortgage refinancings as a result of these lower rates?
Where This Leaves Rocket Stock
At a recent conference, the CEO of Rocket Companies, Jay Farner, talked about its mortgage margins “normalizing” back to 2019 pre-Covid levels. In fact, he said they were now seeing the “best margins we’ve probably ever seen in the mortgage industry.”
This seems to imply that its business should start to improve. But don’t talk to analysts about this. For example, right now the average earnings per share (EPS) estimate for 2021 is $2.04 but only $1.51 for 2022, according to Seeking Alpha. That implies that at yesterday’s closing price of $17.27 per share, RKT stock has a higher price-to-earnings (P/E) multiple for 2022 (i.e., 11.4 for 2022 vs. 8.5 for 2021).
Whether that really will happen is highly questionable. This is especially true now that, clearly, interest rates and mortgage rates are falling, as I have shown above.
What Analysts Think About RKT Stock
TipRanks.com reports that 14 analysts have an average price target of $19.82, or almost 15% higher than yesterday’s close. Meanwhile, Yahoo! Finance which indicates that 19 analysts have an average target value of $19.62. This presents a potential upside of 13.6%.
And then Marketbeat.com reports that 18 analysts have written reports on RKT stock posting an average target price of $21.81 per share. This represents a potential upside of 26.3% for investors in the stock.
So, who says that analysts all think the same? They clearly don’t. And I think this probably reflects the confusion on the stock. It means no one has a clear conviction relating to the direction of interest rates and how that will affect the direction of mortgage rates.
What To Do With RKT Stock
Most patient value investors will wait for RKT stock to become a bargain. This may become apparent when the company produces not only its Q2 earnings but also guidance for Q3. This will most likely take place during the first week of August.
And, of course, certainly, if interest rates keep on falling and if they reach levels at which they started 2021, it should become clear that refinancing will pick up. After all, mortgage activity is high price elastic in relation to mortgage rates.
On the date of publication, Mark R. Hake did not hold a long or short position in any of the securities in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
Mark Hake writes about personal finance on mrhake.medium.com and runs the Total Yield Value Guide which you can review here.
