The “meme stock” craze earlier this year may have fueled an epic short squeeze for Rocket Companies (NYSE:RKT). But, months later, as the Reddit set has come and gone, shares in the mortgage originator have fallen substantially. RKT stock changes hands at around $22 per share now, a price level it has held steady at for several weeks, which makes now an ideal time to consider a position.
How so? For starters, the stock sports a reasonable valuation.
Yes, rising interest rates could lower future demand for mortgages. After last year’s unprecedented slashing of interest rates in response to the coronavirus pandemic, this may be inevitable. But, you can make the argument that Rocket’s current share price overestimates how much this will impact results over the next year or two.
Sell-side projections may call for earnings to pull back between 2021 and 2022. Yet, even assuming it sees this decline (more below), the stock today trades at a moderate multiple of that projected future result.
And, if the company performs better than expected? If rising rates do not cause a material decrease in Rocket’s top and bottom-line results, shares could see tremendous near-term boost. Perhaps not to its short-squeeze highs. But, definitely well above $22 per share.
Over the long term, this mortgage originator’s tech-based, direct-to-customer business model may enable it to continue grabbing a larger share of the overall market.
RKT Stock: Too Much Pessimism Priced Into Shares
Thanks to the Federal Reserve’s near-zero interest rate policy, mortgage origination hit a 15-year high in 2020. But, since hitting a record low of 2.65% in January, the average 30-year fixed mortgage interest rate has risen back up above 3%. In recent weeks, it seems the rise in rates has taken a breather.
Yet, it remains uncertain whether the overall trend will continue throughout the year. This has been the key issue holding down RKT stock. And, considering that, at first glance, rising rates would be bad news for mortgage origination, this makes sense.
Even so, investors may be overestimating how much of a blow rising rates are to the future results of Rocket Companies. Yes, a decrease in demand for new mortgages could cause a decrease in its top- and bottom-line results. But, even assuming earnings fall from its projected $2.49 this year to $1.79 per share (sell-side consensus) in 2022, at today’s prices its clear low expectations are already factored into the share price.
What happens if results exceed today’s muted expectations? Interest rates may be on the rise. But, still historically low, we could see financial results in the coming year come in well above consensus. Rocket Companies CEO Jay Farner made such an argument back in March. If its CEO’s bullishness proves to be true, and the company shows signs of beating expectations next year, we could see a nice short-term boost in its valuation.
The Long-Term Bull Case Is Strong as Well
Much of the focus right now on RKT stock is on the near term. Yet the possibility of it exceeding near-term expectations isn’t the only interesting factor at play. Besides the near-term bull case, there’s a long-term bull case to be made for this leading mortgage company.
Namely, that with its focus on technology, and what it calls its “digital first brand,” this direct-to-customer mortgage originator stands to capture a greater share of the market over time. Other initiatives, such as the company’s Rocket Homes house listing platform, will enable it to become an even larger player in this space.
At today’s prices, investors are taking little of this into account. Instead, they remain hung up on interest rates. Interest rates may play a major role in housing/mortgage market demand. But, the company’s tech and customer-focused business stand to more than make up for it.
In short, whether the housing market continues to thrive, or cools off, the company’s prospects remain strong.
Bottom Line: Now’s the Time to Buy
2020 was a fantastic year for Rocket Companies. Adjusted revenue soared 162%, and its net income rose 277%. But, its pandemic tailwinds have dissipated. Add in the specter of rising interest rates, and it’s understandable why many are skittish about diving into this stock.
However, it’s not set in stone that, after a blockbuster year, results are going to underwhelm in 2021 and 2022. If actual results come in above expectations, shares could see a nice near-term boost. As for its long-term prospects? Those remain solid as well. With its direct-to-customer, “digital first” business model, it stands to gain as it grabs a larger share of the residential mortgage market.
With much on the table to send it higher in the near-term and the long-term, take advantage of the uncertainty. Buy RKT stock while it remains around $22 per share.
On the date of publication, neither Matt McCall nor the InvestorPlace Research Staff member primarily responsible for this article held (either directly or indirectly) any positions in the securities mentioned in the article.
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