At first sight, Rocket companies (NYSE:RKT) looks like a win-win trading choice. He has a great name, tons of meme energy, and a solid foundation. Rarely do you get a mix of a Reddit crowd and a strong business with great income and prospects. And yet, RKT shares did not start.
After an unsuccessful short squeeze earlier this year, Rocket crashed. The stock fell below $ 20 after a weak income statement and the company struggled to get back that mark. This leaves Rocket below where it started trading after its initial public offering (IPO) in 2020.
From this, one might think that Rocket is in recession. But this is not the case. In fact, business is booming. If you looked at Rocket during the IPO, you would be surprised how strong his earnings look now. And yet the shares are available at the same price they debuted after the IPO. So what explains the price of RKT shares?
RKT stock on the rise in housing
Rocket is one of the largest mortgage brokers in the country. This is a great place to be right now. The Covid-19 pandemic has created an unprecedented tailwind for housing. After spending most of the year at home, Americans are looking to improve their living conditions. For many, this means moving from the apartment to the starting house… For other families, isolation has shown the benefits of buying a home with an extra one or two bedrooms.
Add it all up and Rocket has recently launched a record-breaking business. As a result, it is currently trading at a price-earnings ratio of only 8.7x. it bargain in general, and especially in the current market, where most stocks have risen sharply in recent months.
It is important to understand that Rocket gets the business through both buying a home and refinancing. Thanks to the post-pandemic boom, home buying has become an important factor in improving business. However, refinancing this is where Rocket’s problems begin.
What could go wrong?
With such a cheap stock, it is helpful to consider risk factors. Are there any concerns that RKT stock will not earn, despite such good fundamentals? Indeed, as of now, 15% of the company’s free float has been sold short, suggesting that there is a serious bearish outlook on Rocket.
This stems from the mortgage market. Of course, the housing market and the mortgage market are closely related. However, analysts warn that mortgage lending will slow down even while the house is still hot. According to their forecasts, this will happen due to the increase in interest rates. This, in turn, would shut down Rocket’s business.
As interest rates rise, fewer people will want to refinance their mortgages. This, in turn, means a cutback in business for Rocket and its competitors. Against this background, analysts fear both a slowdown in growth in general and a price war between the creators of mortgage loans so that their volumes continue to grow.
This, of course, could have happened to be clear. Interest rates matter. However, refinancing is unlikely to dry up completely. House prices in many markets have risen so much that people can cash out a significant portion of their capital on their property, even if they cannot fix a much lower interest rate. Also, even if refinancing slows down, new home purchases should remain high in the nearest blocks.
RKT stock verdict
Doesn’t make sense why short sellers are still hunting for RKT stock… The share price has already dropped significantly. And the company, unlike many other meme stocks, is not overvalued by any traditional metrics. There is an argument that Rocket’s revenues will drop significantly in the coming months and years. But unless the housing market crashes completely, it’s hard to see how RKT shares could fall too far from here.
Rocket may never skyrocket to the highs Reddit expected. But the odds are that stocks will at least recoup most of their recent losses.
The economy is booming and the demand for housing is huge. Rocket will have many opportunities ahead, and the share price here is attractive to fundamental investors.
As of the date of publication, Jan Bezek did not have (directly or indirectly) any positions in the securities referred to in this article. The opinions expressed in this article are those of the author and are published on InvestorPlace.com. Publishing rules…
Jan Bezek has written over 1000 articles for InvestorPlace.com and Seeking Alpha. He also worked as a junior analyst at Kerrisdale Capital, a $ 300 million New York hedge fund. You can reach him on Twitter at @irbezek.