Detroit’s Rocket Companies Inc (NYSE:RKT) has made a splash in 2021 as one of the year’s classic “meme” stocks. The highlight of this action was a single-day surge of 71% at the start of March. Serious investors will point to the fact that RKT stock is much more than a Reddit-fueled story. After all, the company’s mortgage origination business — Rocket Mortgages — is the largest home mortgage lender in the country. In addition, Rocket has been busily expanding into other hot lines of business, including online used car sales and solar installations.
With its involvement in mortgages, real estate sales, used car sales, and solar power installations, it seems like Rocket Companies is the ultimate plugged-in business. It has practically every hot trend covered here. At its current share price of $16.49, RKT stock is down 15% compared to its 2021 starting point. And off its March 2 close of $41.60 by 59%. Tempting?
On the surface, RKT stock may sound like a no-brainer, especially at this price. When you dig deeper, the buying case gets a lot shakier.
Mortgage Competition
Rocket Mortgages is a huge player in the U.S. as the country’s largest home mortgage lender. In 2020 alone, Rocket Mortgages underwrote $320 billion in home mortgage lending and the company says it’s on track to beat that in 2021.
However, competition is fierce. Fear of competition and the potential for an extended price war with rivals is why Jeffries analyst Ryan Carr downgraded RKT stock from “buy” to “hold” in July. The concern is that an ongoing price war among the mortgage broker channel will not only continue, but has the potential to expand into retail mortgages. This would eat into Rocket’s earnings. Carr’s note to investors was quoted in Business Insider:
“With a price war ongoing in the wholesale channel, we conducted a proprietary survey of mortgage brokers and found very low prices are likely to bleed into retail, while we get the sense that the war will continue past ’22.”
Exposure to Interest Rates and Trends with RKT Stocks
One of my concerns about Rocket is that all of its businesses could be impacted by rising interest rates and consumer spending. With inflation on the rise, the risk of an interest rate hike is growing. The combination of rate hikes plus inflation would likely slow the red-hot real estate market. In addition, the combination does increase the risk of mortgage defaults.
Rocket Companies has also launched several splashy new lines of business this year. RKT stock popped in August when the company announced it was entering the solar installation business. Later the same month, it announced Rocket Auto, an online used car marketplace.
With new interest in zero-emission technology and disruptions to the electrical grid by wildfires and storms, solar power is in the spotlight. And chip shortages that have hobbled auto manufacturers have resulted in used cars being a hot commodity.
Will these two new lines of business be big contributors to Rocket’s bottom line? I have some doubts. First, both are very trendy now. However, the shine may fade, especially for used cars. Second, both are big-ticket items that are reliant on consumer spending. As with mortgages, inflation and any rise in interest rates could have a negative impact.
Lawsuits over RKT Stocks
Adding to my overall uneasiness with Rocket Companies is an ongoing series of shareholder lawsuits.
These include a lawsuit filed in June that contends Rocket concealed rising competition in its mortgage lending business. The most recent that I’m aware of was filed in September. It accuses Cleveland Cavaliers owner — and controlling Rocket shareholder — Dan Gilbert of dumping more than 20 million shares of RKT stock ($500 million worth) just two days before the company reported a poor quarter. The suit accuses Gilbert of acting based on insider information.
Bottom Line on RKT Stock
It’s easy to see why Rocket Companies would be a tempting portfolio addition. However, when you look at the company’s business, there are too many risks there to assure long-term growth for RKT stock. From competition, to interest rates, to the eventual normalization of auto sales, to a series of lawsuits, Rocket has many vulnerabilities.
The investment analysts polled by The Wall Street Journal have RKT stock rated as a consensus hold with an $18.54 price target. Plug the data into Portfolio Grader and it earns an “D” rating. At this point, I feel this company is just not worth gambling on — not for an investor who’s focused on long-term growth.
On the date of publication, neither Louis Navellier nor the InvestorPlace Research Staff member primarily responsible for this article held (either directly or indirectly) any positions in the securities mentioned in this article.
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