Should investors who hold a position in Rocket Companies (NYSE:RKT) stock throw in the towel?
It’s certainly understandable if the idea of dumping RKT stock crosses the minds of shareholders. The Detroit-based mortgage loan provider’s stock has done nothing but disappoint since its initial public offering in August 2020.
Since making its debut on the New York Stock Exchange, Rocket Companies share price has sunk more than 35%. Year-to-date, the stock is down 22%. Given the poor performance, it begs the question of whether Rocket Companies is a stock worth holding onto or if shareholders should simply cut their losses and move on?
Difficult Market
As a mortgage originator, Rocket Companies does well when the housing market is hot and people are taking out new mortgages or refinancing existing ones. A lot of the poor performance in RKT stock has been due to the fact that we’re in a difficult housing market right now.
Consumers are fretting that interest rates are going to rise over the next year or two, making it more expensive to own a house. The latest data shows that the U.S. housing market began to cool at the end of the summer as concerns about rising rates led many consumers to put off a house purchase.
However, with house prices in the U.S. up a record 20% over the past year, some real estate analysts are calling another housing bubble, noting that the price appreciation over the past year has been faster than in the lead up to the 2008 financial crisis. U.S. home prices have, on average, risen 4.1% on an annual basis since 1987, making the 20% jump over the past year truly spectacular. The median price of existing homes in the U.S. is now $352,800, according to the National Association of Realtors.
While some watchdogs, such as the Federal National Mortgage Association (Fannie Mae) are forecasting that the housing market will slowdown throughout 2022, others say a major correction is due in order to get house prices across America down to more affordable and sustainable levels. Whether the housing market cools or crashes, it will not be good for Rocket Companies and its mortgage loan business.
Average Earnings
With steam coming off the housing market, Rocket Companies has reported quarterly earnings that have failed to impress Wall Street. While the financial results haven’t missed their targets per se, they haven’t beaten them either. Rocket Companies last reported quarterly results in August, and they were right in line with expectations. Revenue was a marginal beat, but the company posted earnings per share of 46 cents, which is exactly what analysts had called for.
If there was a bright spot, it was that Rocket’s loan originations in its most recent quarter totaled $83.8 billion compared to $72.3 billion that was expected. The company next reports earnings on Nov. 11.
Rocket Companies CEO Jay Farner continues to emphasize that his company is on track to become the largest retail home purchase lender in the U.S. by the end of 2023. He also stresses that the companies diversification beyond mortgage loans and into car loans and loans to purchase solar panels present sizable growth opportunities for the company.
While that might be true, large institutional investors and those on Wall Street appear to be taking a wait-and-see attitude towards the company and its growth potential. Currently, there is a large short interest in RKT stock, with about 12 million shares shorted, meaning that investors are betting the share price will drop further. The current short interest represents about 10% of the stock’s total float.
Stay On The Sidelines With RKT Stock
There could come a time when Rocket Companies stock turns around and trends higher. But with the housing market overheated, rising interest rates coming down the pike, and a correction of some kind likely within the next 12 to 18 months, now is not a good time to invest in the mortgage lender.
At the same time, it looks like Rocket Companies needs time to strengthen its financials and grow its earnings to the point where they help support the share price. Rocket may eventually become the largest mortgage lender in the U.S., but it’s not there today.
With its share price continuing to slide downwards, investors would be best advised to remain on the sidelines for the time being. RKT stock is not a buy.
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.
