At first glance, Rocket Companies (NYSE:RKT) looks like a sure-fire trading pick. It has a great name, tons of meme energy and solid fundamentals, as well. Rarely do you get the combination of both the Reddit crowd and a strong business with excellent earnings and prospects as well. And yet, RKT stock has failed to launch.
After an abortive short squeeze earlier this year, Rocket crashed. Share dumped below $20 following a weak earnings report and have struggled to reclaim that mark. That leaves Rocket below where it started trading after its initial public offering (IPO) in 202o.
Judging from that, you’d think Rocket was in a slump. It’s not, though. In fact, business is booming. If you’d looked at Rocket at the time of the IPO, you’d be surprised at how strong its earnings look now. And yet the stock is available for merely the same price it debuted at following the IPO. So what explains the price of RKT stock?
RKT Stock Rides The Housing Boom
Rocket is one of the largest mortgage brokers in the country. That’s a great place to be right now. The Covid-19 pandemic created an unprecedented tailwind for housing. After being stuck at home for the better part of a year, Americans are looking to improve their living conditions. For many people, that means moving from an apartment to a starter home. For other families, the lockdowns showed the benefits of buying a house with another bedroom or two.
Add it all up and Rocket has done record business recently. As a result, it is currently trading at just an 8.7x price-to-earnings ratio. That’s a bargain in general, and especially in the current market where most stocks have soared in recent months.
An important thing to realize is that Rocket gets business both from home purchases and from refinancings. Home purchases have been the big driver of improving business thanks to the post-pandemic boom. However, refinancings are where the trouble for Rocket starts.
What Could Go Wrong?
With a stock this cheap, it’s helpful to look at risk factors. Is there some concern that would make RKT stock not work out despite the fundamentals looking so good? Indeed, 15% of the company’s float has been sold short at the moment, which suggests that there is a seriously bearish view on Rocket.
It stems from the mortgage market. The housing market and mortgage markets are closely related, of course. However, analysts warn that mortgage originations will slow down even while housing is still hot. This, they predict, will happen because of rising interest rates. That, in turn, would cause Rocket’s business to trail off.
As interest rates rise, fewer people will want to refinance their mortgages. That, in turn, means less business for Rocket and its competitors. Given that backdrop, analysts fear both a slowdown in general and a pricing war among mortgage originators to keep their volumes up.
This could certainly happen, to be clear. Interest rates matter. However, refinancings are unlikely to totally dry up. Housing prices have gone up so much in many markets that people can cash out a lot of equity from their properties even if they can’t lock in much lower of an interest rate. Also, even while refinancings slow, new home purchases should remain strong in coming quarters.
RKT Stock Verdict
It makes little sense why short sellers are still going after RKT stock. The share price has already declined substantially. And the company, unlike many of the other meme stocks, is not overvalued by any traditional metric. There’s an argument that Rocket’s earnings will fall significantly in coming months and years. But unless the housing market totally implodes, it’s hard to see how RKT stock could slide too much farther from here.
Perhaps Rocket will never blast off to the highs that Reddit trades had anticipated. But the odds favor the shares at least reclaiming most of their recent losses.
The economy is on an upswing and housing demand is sizzling. There will be plenty of opportunity for Rocket ahead, and the stock is priced attractively for fundamental investors here.
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.
Ian Bezek has written more than 1,000 articles for InvestorPlace.com and Seeking Alpha. He also worked as a Junior Analyst for Kerrisdale Capital, a $300 million New York City-based hedge fund. You can reach him on Twitter at @irbezek.