In March, I argued that Rocket Mortgage — the Detroit builder and seller of housing loans — was undervalued.
Since then, the stock has lost 67% of its value. On March 2, when she wrote that 39.7% of her stock was shorted, Rocket’s stock jumped to $43. By January 7, its shares had fallen to about $14.20.
I don’t know why the stock rocked last March – but it could have been a short squeeze. I think many of those who have bet on the stock since then have taken their winnings. The latest report – on December 15 – indicates that short interest was 10.3% of its float – up 7.1% from the previous month, according to the Wall Street Journal.
Is the stock undervalued now or should you bet it will go down? I will avoid stock at current levels.
Last March, I cited above-expected growth, own earnings, and a below-target share price as reasons for the stock’s rally.
It also singled out the risk of higher mortgage rates — which rose from 2.65% (a 30-year fixed rate) in January 2021 to 3.22% this month, according to CNN — as a potential disincentive to its stock.
With mortgage rates expected to rise, the best hope for mortgage speculators is that it can grow much faster than investors anticipate. But these high mortgage rates will make that very difficult.
(I have no financial interest in the said securities).
Rocket’s disappointing Q3 report
Rocket – a provider of personal finance and consumer technology brands including Rocket Mortgage, Rocket Homes, Rocket Loans, Rocket Auto, Rock Central, Amrock, Core Digital Media, Rock Connections, Ledesk and Edison Financial – has grown to become a leader in the US mortgage market United States, according to the Wall Street Journal.
During the pandemic, it grew very quickly. As reported by the magazine, Rocket “doubled its mortgage assets in 2020 and increased by a third over the past fall. It is now the largest mortgage lender in the country, offering nearly as many home loans as Wells Fargo & Co.
Unfortunately for investors, Rocket’s revenue and earnings fell significantly in the third quarter of 2021. According to Inman, its revenue fell 32% to $3.11 billion while net income fell 53% to $1.39 billion.
The problem for Rocket is its reliance on its more profitable refinancing business, which has suffered from high interest rates resulting in lower demand and margins.
While Rocket Mortgage’s closed loan creation volume fell slightly to about $88 billion, less profitable buyout loans made up a larger portion of its assets and Rocket incurred a significant profit — its margin of gain on the sale fell from 4.52% to 3.05%, Inman noted.
Rocket was excited by the results. As Jay Varner, Vice Chairman and CEO of the Rocket Companies, said in a statement, “We had an excellent third quarter…Our mortgage business exceeded the upper bound on guidance for volume of closed loans and profit margin on the sale, while achieving volume Standard purchase.
Rocket declined to provide revenue and earnings guidance for the fourth quarter — instead setting loan volume targets. As CFO Julie Booth told investors on November 4, “[We expect] The volume of loan creation for the whole of 2021 exceeded $350 billion, exceeding the previous record of $320 billion achieved in 2020 by more than 10%.”
How high mortgage rates will reduce demand
When mortgage interest rates go up, the demand for mortgages and mortgage refinancing goes down. This could potentially be detrimental to Rocket’s revenue and profits unless it can generate enough business from other services that don’t rely heavily on lowering mortgage rates.
Experts expect rates to rise due to rising inflation, promising economic growth and a tight labor market. Lawrence Yun, chief economist at the National Association of Realtors, expects the 30-year fixed-rate mortgage to end in 2022 at 3.7%, while Jacob Channel, LendingTree’s
Demand for purchase of mortgages and refinancing has decreased and is likely to decline. “Demand for refinancing continues to shrink, with many borrowers refinancing in 2020 and early 2021, when mortgage rates were about 40 basis points lower,” said Joel Kahn, associate vice president of economic and industry forecasting at the MBA. As noted by CNN.
With the tailwind driving — the milder Omicron variant and the resilient economy — George Ratio, director of economic research at Realtor.com, said, “I expect upward momentum in Treasury rates to continue to drive mortgage rates higher.”
Demand for mortgage refinancing is going to plunge. As the magazine wrote, “refinancing operations across the industry are expected to decline by about two-thirds” in 2022.
Could the rocket grow faster than investors expect?
Rocket is trying to diversify its revenue streams to grow faster than these negative trends might imply.
Rocket – which gets “nearly all of its revenue from mortgages” – has been more aggressive than its peers in trying to expand beyond refinancing. Here are three examples:
- Rocket Homes, Zillow
Similar to the listings platform that aims to connect with potential home buyers, it was launched in 2018;
- Rocket Autos connects car buyers with dealers; And
- The magazine wrote that Truebill, a personal finance startup for splitting billing and subscription cancellation, was acquired by Rocket last month.
If you are concerned about Rocket’s future path, you should assess whether Dan Gilbert is the right source of insight. Gilbert, who founded the company in 1985, is now the president of Rocket – and together with his wife, controls 79% of the voting power of Rocket shares. He also owns the Cleveland Cavaliers Club.
Rocket – which presents itself as a fintech company – hopes it will be valued as such. The magazine noted that Rocket claimed to have 153 million visitors to its platform in 2010 – a 61% increase from 2019.
Rocket aspires to convert its visitors from Rocket Homes and the 2.5 million visitors it expects to add with their Truebill purchase will become Rocket customers when they purchase a home, according to the magazine.
Analysts are not beating the drums to buy rocket stocks. According to CNN Business, 17 analysts covering the company have a “hold” rating. And “14 analysts providing 12-month price forecasts for rocket companies have a median target of $17.25” — about 22% above the current price.
Just because Rocket’s stock is 67% below its peak, that doesn’t make it cheap. With prices rising, I don’t see any tangible catalysts for revenue growth in 2022.