Things look to have gone from bad to worse for mortgage loan provider Rocket Companies (NYSE:RKT).
The Detroit-based lender behind the popular Quicken Loans brand of mortgages has seen its share price sink 17% this year to $16.75. RKT stock is now over 30% below its 2020 initial public offering (IPO) price of $24.90.
The decline comes even though there is currently a strong housing market fueled by historically low interest rates that has Americans taking out new mortgages or refinancing existing ones. The drop has left many analysts and investors questioning what it will take for Rocket Companies to right its ship and get its stock price moving higher.
Strong Mortgage Originations
The drop of RKT stock has been especially frustrating as it comes at a time of record results for the company. In this year’s second quarter, Rocket Companies issued the most home-purchase loans in its 36-year history.
The volume of Rocket’s mortgages for new homes nearly doubled year-over-year in Q2. Unfortunately, rock-bottom low interest rates ate into the company’s profits. Rocket reported Q2 net income of $1 billion, less than a third of the $3.4 billion that it generated a year earlier. Its revenue also declined to $2.7 billion from $5 billion during the same period a year earlier.
While Rocket Companies carefully explained that its earnings decline was due entirely to interest rates dropping to record lows, sending homeowners scrambling to refinance their existing mortgages, Wall Street was not in a forgiving mood. The Street completely disregarded the fact that Rocket’s volume had doubled in Q2.
Professional analysts also looked past the bullish forward guidance provided by Rocket Companies, which said it expects its loan volume to be between $82 billion and $87 billion in Q3.
While Rocket Companies primarily deals in home and auto loans, the company is nimble and pushing into new ventures. It announced this summer that it was entering into a new relationship with life insurer MassMutual that will enable the latter company’s more than 9,000 agents to help originate home loans through Rocket Mortgage. This deal should help boost Rocket Companies’ mortgage business by providing a new venue for originating home loans.
Rocket Companies also said recently that it plans to launch a new residential solar division next year. Chairman Dan Gilbert has said that the end goal is for Rocket Companies to provide an all-in-one service to prospective homeowners.
In the near future, people will be able to get a home appraisal, mortgage loan, home insurance, auto insurance and solar panels under one roof from Rocket Companies. It’s an ambitious plan, but one that is achievable, considering that the company already provides most of these services to American consumers.
If there is one thing holding Rocket Companies back, it is the current housing market itself. Besides historically low interest rates fueled by the global pandemic, Rocket is also navigating a housing market that has reached a saturation point and whose demand is starting to decline.
Mortgage applications in the U.S. fell by more than 3% over the summer, according to the Mortgage Bankers Association. Rocket Companies’ executives said during the firm’s recent quarterly results call that they expect new mortgage loans to slow through the remainder of this year.
A just-released report from Realtor.com found that the U.S. is currently more than five million homes short of meeting demand, while single-family home construction is running at the slowest pace since 1995.
Construction has suffered from a prolonged labor shortage that began before the Covid-19 pandemic and was then accelerated by it. Supply chain disruptions in the past year have pushed up the prices of building materials, and land prices have also increased. In short, Rocket Companies is facing a perfect storm of difficult conditions.
Buy and Hold RKT Stock
Rocket Companies remains an attractive stock in spite of the current challenges facing the company. Investors with a long time horizon should take advantage of the recent decline of the stock and buy the shares while they are on sale.
Among 13 analysts, the median price target on RKT stock is $19 per share, implying a future gain of 13%. But be sure to hold RKT stock over the long-term. In the near-term, the stock is likely to continue experiencing volatility due to prevailing conditions in the housing market. But over the long-term, Rocket Companies is a solid company that’s likely to deliver sizeable profits for investors.
Disclosure: On the date of publication, Joel Baglole 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.