Is it a meme or a momo stock? Rocket Mortgage (NYSE:RKT) stock qualifies for both tags.
In March it memed 130% higher in a week, then lost more than half its value in three weeks. During the three months prior, it seesawed seven times more than 20% each.
Clearly this one is also a momentum stock that moves fast and violently. Investors who brave it need to have strong stomachs. I say bring the Dramamine and your helmets because it’s going to get bumpy.
Here comes the spoiler alert: I like it down here.
Three months ago I emphatically suggested that RKT stock was a bargain at $16.50 per share. Those who agreed enjoyed a 40% rally. Since then, price has reverted to the that May starting zone. Therefore, my conclusion today is that it’s time to rinse and repeat. The caveat being is that the indices don’t crash this fall.
For the last two months, Rocket has been hovering close to its all-time lows. Meme stocks in general have also fallen out of favor, so it may be struggling in sympathy. We saw similar action from other ones like Clover (NASDAQ:CLOV).
Own RKT Stock for the Long Term
From an investment perspective, the shares are attractive for the long term. Its financial statements are strong. The profit-and-loss report shows impressive revenue growth. They more than tripled it in four years. Moreover, they are profitable and have a single digit price-to-earnings ratio.
Any which way you slice it, this stock is lean but not mean yet. It has failed to snap out of the lower-high trend that started in march.
Luckily it is trying to establish a floor. For that, I would see how it does against the bottom from July 20. That candle was bullish because the buyers stepped in with force.
In addition, RKT stock has not had a lower close since then. Therefore, it is important for the bulls to defend the $17 level ferociously. Otherwise they will have a setback that would require a lot of work from which to recover.
What to Do
If I already own shares, I would be patient for the long haul. Along the way I would also consider selling covered calls against them. Options are an important tool for the modern investors. This would be like creating synthetic dividends, so they are worth investigating. This is not the same as selling naked calls, which is extremely dangerous.
Investors looking to add positions can do so but not all in at once. There is extrinsic risk from the stock markets in general. We are still near all-time highs and investors are so far ignoring the end of the QE. No, it will not end abruptly, but the taper is the beginning of the end. The process will take more than a year maybe but Wall Street prices in bad news months in advance.
In this situation, I prefer selling puts much lower instead of buying shares outright. This could award me shares at a deep discount. And if the drop doesn’t happen, then I would have created income out of thin air. I like taking calculated risks, and this method is the definition of it.
It’s Not Rocket Science Yet They Got it Wrong
There isn’t a lot to say other than Wall Street might be wrong about this RKT stock. Most of the analysts who cover it are in a holding pattern on it. Their average price target according to Yahoo finance is just $2 above current price. In due time, I bet they will raise these numbers.
Time will be the judge and investors should be patient with it. This is not a new company, it’s only new to Wall Street. Quicken Loans has been operating for decades. RKT simply needs time to build up kudos points with investors.
On the date of publication, Nicolas Chahine 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.
Nicolas Chahine is the managing director of SellSpreads.com.