Will Rocket Companies Continue to Be a Failure to Launch?

Rocket Companies (NYSE:RKT) is reaching that point where retail investors are getting antsy. And I say retail investors intentionally. Rocket Companies is drawing virtually no interest from institutional investors. RKT stock is only down 15% in 2021. But if you were late to the party that sent the stock “to the moon” in early February, you’re down 59%.

RKT stock Rocket Mortgage is open on a smartphone
Source: Lori Butcher / Shutterstock.com

  

However, at the time I’m writing this, the stock is up 7% over the last five trading days. I’m not exactly sure why.  

Rocket is using its proprietary technology to make the mortgage approval process simple. And I have no reason to believe that the company won’t achieve its stated goal of being the largest retail home purchase lender in the nation by the end of 2023. And the company has branched out with its Rocket Auto and a solar program that are both leaning into areas that may provide significant growth.  

But those aren’t the reasons why retail investors may see RKT stock as a viable trade. The stock has a low price/earnings ratio that makes it attractive to value investors. And if the company continues to beat expectations (as it has done every quarter since going public), it could raise the stock price.  

And that may be what retail investors really want. Because with a short interest ratio of just below 10%, a bullish move would force investors with a short position to buy back their shares (I.e. a short squeeze).  

This is par for the course with many equities these days. Retail investors see the same information. They know which stocks are likely to force a short squeeze. And it’s been a profitable trade.  

It may be again. But that will only have staying power if Rocket Companies continues to show strong growth. Of that, I’m not so sure.

 

The Canary in the Coal Mine 

I can see from my social media feed that homes are still selling quickly. That’s not surprising. The housing market was a canary in the coal mine to the current supply chain crisis. At the onset of the pandemic, many individuals decided it was time to buy a new home. This was particularly true of that coveted first-time home buyer. 

What happened next is predictable. Supply went down but demand remained strong. That drove home prices higher as high demand was chasing scarcer and scarcer supply.  

And the problem isn’t going away. The National Association of Realtors recently cited research from the Rosen Consulting Group that estimates between 5.5 million and 6.8 million new houses are needed to meet the demand. That same research is showing that existing home sales dropped by 2% from July to August while home prices continued to increase in all regions. 

Investors in RKT Stock Should Lower Their Sights 

I like many things that Rocket Companies is doing. I think any steps that can be taken to simplify the mortgage buying process is a good use of technology. And the company continues to deliver innovative solutions for their network of independent mortgage brokers and their customers.  

The simple question that I ask when I look at RKT stock is whether I see the supply-demand situation resolving itself any time soon. For me that answer is no. And that’s why I agree with analysts who have a consensus belief that Rocket Companies is a hold.  

RKT stock went down during one of the strongest housing markets in a decade. It simply seems likely that there is a ceiling on the stock that may be much lower than investors are factoring in. If you have a position, look at the consensus price of analysts. That may make a good price to take some profits.  

On the date of publication, Chris Markoch 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.  

Chris Markoch is a freelance financial copywriter who has been covering the market for seven years. He has been writing for InvestorPlace since 2019. 


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