Rocket sees a GameStop-like rally, but his business outlook is better

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This week, Rocket Companies Inc. is being targeted by Reddit day traders who have driven up the cost of GameStop Corp. shares. But unlike the besieged video game retail chain, experts say the underlying business fundamentals of the online mortgage lender are much stronger.

Shares of billionaire Dan Gilbert’s Rocket Mortgage-based Detroit-based parent company on Tuesday closed 71% higher at $ 41.60. Like GameStop, Rocket is among the best-selling stocks on the market, with investors betting the stock price will go down – a pain for bullish retail investors on WallStreetBets’ subreddit forum who have come together to raise the price of the most. major originator of US mortgages.

Where Rocket’s gains diverge from the GameStop saga, however, is that the frenzy around the Texas-based retailer – which, despite its efforts to reorient itself around e-commerce, continues to focus on brick and mortar. mortar – was largely divorced. of its business prospects. In contrast, Rocket has been making record profits since its IPO in August amid historically low interest rates and the distribution of trillions of dollars in stimulus packages during the COVID-19 pandemic.

“These stocks have created a new real estate boom as people rush to refinance or take out new mortgages at historically low rates,” said David Kudla, CEO of Grand Blanc-based Mainstay Capital Management, in an e- mail. “Rocket Companies should benefit from this environment. While the GameStop saga doesn’t have a lot of fundamental reasoning, the situation with Rocket Companies may play out differently.”

Competitors also rode the wave: United Wholesale Mortgage Holdings Corp., based in Pontiac, closed almost 20% higher at $ 9.13, a sign that the Rocket uplift may be wider and more focused. on the fundamentals of the mortgage industry.

Rocket on Tuesday was the action with the second-highest number of mentions on Reddit, the social media platform that kicked off the rally, pushing GameStop up 1,500% over two weeks in January to oust short sellers. These sentiment-fueled spurts of social media have created a bunch of “memes stocks.” Another is the struggling movie chain AMC Entertainment Holdings Inc..

Rocket is the ninth best-selling stock short, according to MarketWatch, with nearly 40% of its available stocks sold short mostly through hedge funds. That’s more than GameStop’s 30%. Short selling is when an investor borrows a security and sells it on the open market, planning to buy it back later for less.

“When people see this, they think you can break the sellers,” Jim Cramer, prominent investor and market commentator, told CNBC. “I’ve been a huge fan of (Rocket CEO) Jay Farner and (Chairman) Dan Gilbert … and frankly I don’t understand why the stock didn’t respond to what was a really good quarter where they basically told a story that just said, “We can show how when rates go up, it hasn’t hurt our business.” When rates go down, it doesn’t hurt our business.

For refinances in particular, the lender is dependent on interest rates, which are rising from January lows.

“It sells for a higher price-to-earnings ratio than its competitors,” Jay Ritter, professor of finance at the University of Florida, also noted of Rocket. “Some investors think the profit / price ratio is too important.”

Rocket did not respond to the request for comment on Tuesday, but he could also do his own job of eliminating short sellers. He announced a dividend of $ 1.11 per share payable later this month: investors with a short position must pay the dividend to the company instead of receiving it, according to federal rules.

Rocket has helped revolutionize their industry by offering a completely online way to get a mortgage. The company last week posted a record profit of $ 9.4 billion on sales of $ 15.7 billion in 2020 amid booming housing and refinancing. That was up from a profit of $ 897 million on revenue of $ 5.1 billion in 2019.

According to Ihor Dusaniwsky, managing director of predictive analytics at analytics firm S3 Partners LLC, short sellers lost about $ 860 million from Tuesday’s hike alone, bringing the total to over a billion dollars in 2021.

“We are once again witnessing a battle between long buying and short selling,” he wrote in a research note. The activity, however, is probably not entirely driven by Reddit: “We’re also seeing value investors buying RKT stocks based on their better-than-expected (first) quarter guidance and strong mortgage activity. Short sellers can be outnumbered and outmatched in this battle. and the short squeeze can come sooner rather than later. “

Rocket had its best trading day since its initial public offering in August. Tuesday’s close was up 131% since its IPO at $ 18, although the price fell in after-hours trading.

The rocket leaders, while sharing of 2020 financial results last week, were optimistic for the first quarter of 2021. They forecast a total volume of closed loans of between $ 98 billion and $ 103 billion, an increase of at least 90% year-over-year.

“It would be a shame if Rocket were to become a toy for gamers,” Erik Gordon, professor at the Ross School of Business at the University of Michigan, said by email. “It’s a real company that has done well for years by investing in innovation. It deserves to be evaluated on its prospects.

Investors shorted 49.7 million Rocket shares, according to S3 Partners. The value of the shares in the short position not yet closed was $ 1.21 billion. Short stocks are up 8.2% from last week.

Meanwhile, GameStop stocks continue to trade at above normal levels. Still, the stock price of $ 116.93 when the market opened on Tuesday was well below the top of more than $ 400 which it reached at the end of January.

“It makes the stock market more like a casino,” Ritter said of stocks memes, “which is not good for companies raising capital or using the stock market to raise capital. Investors think they are going to own stocks that are valued not on fundamentals but on luck, serious long-term investors will be less willing to buy the stock. “

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Twitter: @BreanaCNoble

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Twitter: @JGrzelewski


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