Avoid the Pain in Rocket Companies as It Suffers From Industry Headwinds

  • Rocket Companies (RKT) continues to fall, down 40% on the year.
  • The mortgage loan industry is getting clobbered as interest rates rise, putting housing out of reach for many Americans.
  • Analysts are lining up to downgrade RKT stock, sending a clear signal to investors.
The logo for Rocket Companies displayed on a smartphone screen (RKT).

Source: Lori Butcher / Shutterstock.com

Down 40% year-to-date and sliding toward penny stock territory, shares of Rocket Companies (NYSE:RKT) have fizzled. The Detroit-based mortgage loan provider that performs electronic closings across the U.S. has seen its shares beaten badly over the past year. Owing to an overheated housing market, rising interest rates and poor financial performance, RKT stock has declined 60% over the past 12 months.

The stock is nearly 70% lower than its all-time high of $28.42. It reached that level in August 2020 shortly after its initial public offering (IPO). And with the share price continuing to slip lower, the question arises: What will it take to turn things around for Rocket Companies?

RKT Rocket Companies $8.90

Supporting the Home Team

In a show of support, chief executive Jay Farner bought 21,700 shares of RKT stock on April 25. It was his 11th purchase of the stock during the month of April and brings his stake in the company to 1.8 million shares worth nearly $17 million.

Typically, executives purchasing shares of the company they lead, known as “insider buying,” is seen as a vote of confidence. Outside investors often see management having skin in the game as favorable, and it can inspire others to also buy stock.

However, in the case of Rocket Companies, Jay Farner’s purchases throughout April did nothing to reverse the downward trajectory of RKT shares, which have declined 20% in the past four weeks. It appears the macroeconomic headwinds confronting the housing market and mortgage companies, combined with Rocket Companies’ financial performance, have been too much for investors and analysts to look past.

Despite record loan volumes in 2021, Rocket Companies’ net income for the year declined 35% on an annual basis to $12.9 billion. The company followed its last earnings report by announcing it is laying off 8% of its 26,000 employees, most of whom work in Detroit.

Macroeconomic Headwinds for RKT Stock

To be fair, Rocket Companies is facing a number of issues that are negatively impacting all mortgage companies right now. The average 30-year mortgage rate in the U.S. now sits at 5%, up from less than 3% a year ago.

This has put an end to the purchase and refinancing boom that occurred during the pandemic, when homeowners looked to upgrade or move from their existing home. With the U.S. Federal Reserve forecast to continue raising interest rates throughout this year, the situation pertaining to mortgage origination is expected to worsen in the coming months.

Analysts have been watching developments in the housing market and downgrading their ratings on RKT stock. Barclays, Morgan Stanley, Goldman Sachs and Credit Suisse have each lowered their price targets for Rocket Companies.

The new targets range from $11 to $13 per share. While higher than where the stock currently trades, having so many prominent Wall Street firms issue downgrades in quick succession does not inspire confidence. It indicates the consensus view is that things are getting worse for Rocket Companies.

Steer Clear Of RKT Stock

Rocket Companies stock is not doing well, and the situation is unlikely to improve in the near-term given the macroeconomic forces working against the industry. Declining financial results and staff layoffs tell the tale of RKT stock.

The fact that the CEO is continuing to buy stock at depressed prices should not distract investors from the fact that the Detroit mortgage lender is in serious financial straits. In the current environment, and with the situation clearly worsening, RKT stock is not a buy.

On the date of publication, Joel Baglole held a long position in MS. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.  

Joel Baglole has been a business journalist for 20 years. He spent five years as a staff reporter at The Wall Street Journal, and has also written for The Washington Post and Toronto Star newspapers, as well as financial websites such as The Motley Fool and Investopedia.

Article printed from InvestorPlace Media, https://investorplace.com/2022/05/avoid-the-pain-in-rkt-stock-as-it-suffers-from-industry-headwinds/.

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