Seen from the surface, Rocket Companies (NYSE:RKT) stock looks dirt cheap.
While other fintechs are going “to the Moon,” RKT stock has lost one-third of its value since an August 2020 IPO. It trades today at about $17.
That’s a market cap of just $2.4 billion, for a company that had revenue of $4.5 billion in just the first half of the year. The price to earnings ratio is just over 6.
Even the memesters at Wallstreetbets have been unable to keep the stock up. They briefly pumped it to $41 at the start of March on the strength of a short squeeze. A week later it was below $25, and it’s only gone lower since then.
If you watch TV, you know Rocket. Its ads, most recently starring comedian Tracy Morgan, are a Super Bowl staple. It was originally Quicken Loans.
Rocket has been around, in one form or another, since 1985. This is not its first rodeo.
Intuit (NASDAQ:INTU) bought it at the height of the dot-com bubble, in 1999. Founder Dan Gilbert bought it back for barely one-tenth that price in 2002.
It suffered a hit during the Great Recession, but by 2018 was the country’s largest mortgage lender. Along the way, it acquired subsidiaries like Dictionary.Com from IAC/Interactive (NASDAQ:IACI). Gilbert bought the Cleveland Cavaliers. He also owns a casino company.
Rocket is a mortgage wholesaler. Its ads target home buyers, who use its app to get loans approved. Rocket then sells on the loans. The cash coming in is a tiny fraction of its loan business.
While it does do things like reverse mortgages, Rocket’s fortunes mainly ride on the housing market. Which remains strong, though many fear a bubble. Wholesale brokerage has also become a highly competitive industry. Thse factors make analysts skeptical about future earnings for RKT stock.
There’s also an investor lawsuit filed after its recent fall. The suit alleges Rocket misled investors about the margins it could get on reselling its loans, which are its main source of cash.
A Closer Look at RKT Stock
Rocket next reports earnings on Nov. 11. Analysts expect 42 cents per share on revenue of $2.85 billion. That would seem to justify a higher stock price. But analysts at Tipranks only rate it a hold, with 2 of 11 saying buy it and 2 saying sell.
This has some Investorplace writers smelling a bargain. Our David Moadel calls Rocket one of the last true value stocks out there. Our Nicholas Chahine believes it won’t stay in the bargain bin forever.
Analysts disagree. Both Jefferies and Wedbush downgraded Rocket in July. They predict mortgage volumes will fall and competition for loans will rise. The most recent report on existing home sales, for July, showed 2% more transactions than a year earlier.
The release of Rocket’s second-quarter report should have silenced the doubters. Adjusted net income of $920 million, 46 cents per share and revenue of $2.67 billion, caused a brief pop in the stock. The company since has given all of that back.
The Bottom Line
This isn’t my first rodeo, either. Just a few years ago, carmakers like Ford Motor (NYSE:F) were in this fix, with single-digit PEs and stocks that refused to budge.
I got burned calling the turn in Ford early and admitted as much to readers. That’s what you need to worry about here.
Rocket will turn. Either its earnings will find value, or it will be sold to a fintech that wants the volume. The question is how long you want your money waiting for that day.
Right now, the smart money is saying sell RKT stock but Rocket Mortgage is a sound business. It’s when everyone screams sell that I buy. Rocket won’t go to the Moon, but a patient speculator can make money on it. Just remember to be patient.
Ford is up 30% since my sale and apology.
On the date of publication, Dana Blankenhorn held no positions in companies mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
Dana Blankenhorn has been a financial and technology journalist since 1978. He is the author of Living With Moore’s Law: Past, Present and Future available at the Amazon Kindle store. Write him at danablankenhorn@gmail.com or tweet him at @danablankenhorn. He writes a Substack newsletter, Facing the Future, which covers technology, markets, and politics.
