Despite Risk, Rocket Is Bound to Recover Sooner or Later

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Easily one of the most perplexing markets to analyze during in this phase of the pandemic has been the remarkable housing boom. Fueled by multi-year-low interest rates (which in turn reduces borrowing costs) along with good ole fashioned panic purchasing, the residential real estate sector hit astounding plateaus, bolstering Rocket Companies (NYSE:RKT). But is this narrative enough to sustain RKT stock for the long haul?

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

Source: Lori Butcher / Shutterstock.com

Back in June, I poured some cold water on such a bullish proposition, noting that a possible rate hike could quickly dampen sentiment. Sure, the stimulus checks help and all, but let’s be honest: anybody who felt as if they received a lifechanging amount of money from the government financial assistance probably isn’t in any shape to buy a house in a major metropolitan area.

In other words, it’s the ultra-low borrowing costs relative to prior levels that convinced many to take the plunge. Raise those rates and housing prices will likely come down to a lower threshold, which is good for consumers but not for RKT stock.

Should rates swing higher, that would kill demand for refinancing, which is not what Rocket Companies needs. According to a CNBC report, the organization is “the largest mortgage lender in the U.S. through its Rocket Mortgage division.”

Further, RKT stock has been declining throughout the year, with the underlying company’s declared foray into the solar industry providing only a temporary (though admittedly very robust) blip higher. Year-to-date, Rocket shares have lost over 16% of market value.

However, RKT stock may have a bit of reprieve from recent headlines. According to a report from the New York Times, Federal Reserve chair Jerome Powell implied that a “rate increase was not on the table for some time.” If so, that could buy Rocket some time.

Automotive Sector to Provide Some Relief for RKT Stock

During my prior articles regarding RKT stock, I’ve been fixated on the mortgage lending side of things for obvious reasons. But what I didn’t cover with much emphasis is that Rocket has been busy expanding its auto lending business, per a report from American Banker. In fact, the company seeks to sell cars to its existing mortgage customers.

A few months ago, Rocket announced a partnership with financial technology firm AutoFi, a platform that “lets customers browse and select cars online before heading to a dealership, working with lenders to ensure that buyers are preapproved for loans.”

Another example of a market that perplexed me — and I’m sure millions of others — I assumed that the extreme bull market of used cars would have demonstrated signs of easing up. Instead, I believe recent evidence points to elevated auto prices throughout 2022, which again may buy time for RKT stock.

Around the middle of this year, we began hearing reports that wholesale prices for secondhand vehicles declined for the first time in months, which seemed to suggest that price relief for consumers was on the horizon. However, the semiconductor shortage worsened, as Asia — where most of these computer chips are made — suffered from rising Covid-19 infections.

Late last month, Toyota (NYSE:TM) dropped a bombshell — the automaking giant must cut global production by 40% in September. Toyota joins several other manufacturers that had to make similar sacrifices throughout this year.

The wild part is that even if the automotive industry didn’t suffer from production cuts, and assuming that semiconductor facilities gave the green light to 100% production, it’s not as if new vehicles will suddenly appear on dealership lots the next day.

It’s a process that will take time to figure out. In the meantime, used cars directly sourced from the consumer market represent the most viable solution.

Still a Risky Proposition

Recognizing that key fundamental factors have turned positive for RKT stock, there’s an argument to be made for the bullish contrarian position. Plus, shares are priced at a significant discount from prior highs. Over the trailing six months, RKT shed 31%. At a certain point, you’ve got to figure a relevant company like this will make its way back northward.

However, you must also keep an eye on consumer willingness and ability to buy homes and open mortgage accounts, which is Rocket’s primary revenue generator. It’s still an uncertain situation, which is why I’m not exactly gung-ho about RKT stock. But if you want to take a stab with speculation funds, the pricing for RKT is certainly much more attractive then when I discussed the stock in June.

On the date of publication, Josh Enomoto 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.

A former senior business analyst for Sony Electronics, Josh Enomoto has helped broker major contracts with Fortune Global 500 companies. Over the past several years, he has delivered unique, critical insights for the investment markets, as well as various other industries including legal, construction management, and healthcare.

A former senior business analyst for Sony Electronics, Josh Enomoto has helped broker major contracts with Fortune Global 500 companies. Over the past several years, he has delivered unique, critical insights for the investment markets, as well as various other industries including legal, construction management, and healthcare. Tweet him at @EnomotoMedia.


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