Last year, Rocket Companies (NYSE:RKT) failed to launch despite favorable economic tailwinds. Now, the sky has darkened and RKT stock has seemingly lost all hopes of ever blasting off.
The once-popular meme stock has lost as much as 60% of its value since its peak from last year amid a rapidly dimming outlook for the mortgage industry. But is all hope gone for Rocket and its mortgage underwriting business? No, it is not a lost cause, even if its stock chart looks like one at the moment.
Rocket is one of the country’s largest mortgage originators. This is a volume business that earns a lot more money when many people are buying homes. Rocket also makes money from refinancing transactions.
2021 was a record year for the industry. People bought homes in droves as the pandemic motivated folks to upgrade their living spaces. On top of that, with rock-bottom interest rates, the market for refinancing transactions was also hot. It was the best of both worlds for Rocket and its immediate peers such as UWM Holdings (NYSE:UWMC).
Rocket in particular earned more than $2 per share over the past 12 months. This, incredibly enough, adds up to a trailing price-to-earnings (P/E) ratio of just 4x. The stock is also trading at just 4.2x EBITDA.
Shares look dirt cheap based on past results. Unfortunately, the future is less promising. Refinancing activity will decline markedly with mortgage rates shooting above the 5% mark in recent weeks. New housing sales seem likely to slow down as well, though actual Commerce Department data doesn’t reflect a slowdown yet.
Still, it seems wise to prepare for the worst. Analyst are forecasting Rocket’s earnings will fall by 52% this year compared to 2021. The funny thing is, that still puts it at less than 9x this year’s estimated earnings. That’s hardly expensive.
And at some point, be it 2023 or later, the housing market will start to accelerate once again. 2022 is going to be a deeply unpleasant year for mortgage originators such as RKT stock, but there’s value on offer for patient long-term investors.
I recently highlighted how Home Depot (NYSE:HD) is starting to look like a bargain after its recent tumble. That’s because selling in the housing sector right now is indiscriminate. Whether it’s home builders, online realty services, mortgage underwriters, regional banks or home improvement stores, it’s all going down. Traders are simply dumping everything thanks to higher interest rates.
Maybe that will end up being the right reaction. Sometimes, the person who panics first saves more of their capital than the rest of the crowd. I’d argue, however, that current housing market conditions in no way resemble 2008, and people are simply responding to the last crisis. The banking system is on far more solid footing this time around, and demographics remain favorable for household formation in coming years.
All that should add up to a robust recovery for housing in general and RKT stock in particular once interest rates start to stabilize.
On the date of publication, Ian Bezek 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.
