Down 67% from peak, Rocket mortgage stock is not a good deal


Back in March, I argued that Rocket Mortgage – a Detroit-based mortgage maker and seller – was undervalued.

Since then, the stock has lost 67% of its value. On March 2, when I wrote that 39.7% of its stock had been sold short, Rocket’s stock jumped to $ 43. By January 7, its shares had fallen to around $ 14.20.

I don’t know why the stock climbed last March – but it could have been a short squeeze. I think a lot of those who bet against the action have since taken their profits. The most recent report – Dec. 15 – notes that short-term interest rates were 10.3% of its float – up 7.1% from the previous month, according to the Wall Street Journal.

Is the stock even more undervalued now or should we bet it will go down? I would avoid the stock at current levels.

Back in March, I cited its above-expectation growth, special dividend, and below-target price as reasons why the stock would rise.

I also highlighted the risk of rising mortgage rates – which fell from 2.65% (30-year fixed rate) in January 2021 to 3.22% this month, according to CNN – as a possible shock absorber on its action.

With mortgage rates set to rise, the best hope for Rocket Bulls is that they can grow much faster than investors expect. But those higher mortgage rates will make that very difficult.

(I have no financial interest in the titles mentioned).

Rocket’s disappointing third quarter 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, Lendesk and Edison Financial – has become the market leader in US mortgage market, according to the Wall Street Journal.

During the pandemic, he grew very quickly. As the Journal reports, Rocket “doubled his mortgages in 2020 and increased them by another third until last fall. It is now the largest mortgage lender in the country, making almost as many home loans as Wells Fargo & Co.

WFC
and JPMorgan Chase & Co.

JPM
combined.”

Unfortunately for investors, Rocket’s revenue and profits declined significantly in the third quarter of 2021. According to Inman, its revenue fell 32% to $ 3.11 billion while net profit fell 53% to 1, $ 39 billion.

The problem Rocket faces is its reliance on its more profitable refinancing business, which has suffered from rising interest rates and falling demand and margins.

While Rocket Mortgage’s closed loan origination volume edged down to around $ 88 billion, less profitable purchase loans made up a larger portion of its assets and cost Rocket considerable profitability – its margin gain. sales drop from 4.52% to 3.05%, Inman noted.

Rocket was thrilled with the results. As Jay Farner, Vice President and CEO of Rocket Companies, said in a statement, “We had an excellent third quarter … Our core mortgage lending business exceeded the forecast high for volume. of closed loans and profit margin on sale, while achieving record buying volume.

Rocket declined to provide revenue and profit guidance for the fourth quarter – instead, he sets lending volume targets. As CFO Julie Booth told investors on November 4: “[We expect] our closed loan origination volume for the full year of 2021 will exceed $ 350 billion, exceeding by more than 10% the previous record of $ 320 billion reached in 2020. “

How rising mortgage rates will reduce demand

When mortgage interest rates rise, the demand for mortgages and mortgage refinancing decreases. This could hurt Rocket’s income and profits, unless it can generate enough business from other services that aren’t so dependent on falling mortgage rates.

Experts predict a rate hike due to higher inflation, promising economic growth and a tight labor market. Lawrence Yun, chief economist of the National Association of Realtors, expects the 30-year fixed mortgage rate to end at 3.7% in 2022 while Jacob Channel, LendingTree’s

TREE
senior economic analyst, forecasts rates of nearly 4%, according to CNN.

The demand for purchase mortgages and refinances is down and is expected to decline. Joel Kan, associate vice president of economic and industrial forecasting at MBA, said that “the demand for refinancing continues to decline as many borrowers refinanced in 2020 and early 2021, when mortgage rates were approximately lower. 40 basis points, “CNN noted.

With strong favorable winds – the softer Omicron variant and a resilient economy – George Ratiu, director of economic research at Realtor.com, said: “I expect the upward momentum in Treasury rates to continue. to drive up mortgage rates.

Demand for mortgage refinancing will plunge. As the Journal writes, “Refinancing is expected to drop by nearly two-thirds across the industry” in 2022.

Could Rocket grow faster than investors expect?

Rocket is trying to diversify its revenue streams to grow faster than these negative trends suggest.

Rocket – who derives “almost all of his income from mortgages” – has been more aggressive than his peers in trying to grow beyond refinancing. Here are three examples:

  • Rocket Homes, a Zillow

    Z
    a similar ads platform to connect it to potential home buyers was launched in 2018;
  • Rocket Autos connects car buyers with dealerships; and
  • Truebill, a personal finance startup for bill splitting and subscription cancellation, was acquired by Rocket last month, the Journal wrote.

If you’re worried about Rocket’s future trajectory, you need to assess whether Dan Gilbert is the right source of vision. Gilbert, who founded the company in 1985, is now president of Rocket – and with his wife controls 79% of the voting rights in Rocket shares. He also owns the Cleveland Cavaliers.

Rocket – which presents itself as a fintech – hopes to be valued as such. The Journal noted that Rocket claimed to have 153 million visitors to its platform in 2010, 61% more than in 2019.

Rocket aspires to transform his visitors to Rocket Homes and the 2.5 million he expects to add through his Truebill purchase to become Rocket customers when they buy a home, according to the Journal.

Analysts are not hitting the drums to buy Rocket stock. According to CNN Business, 17 analysts who cover the company have a “pending” rating. And “14 analysts offering 12-month price forecasts for Rocket Companies have a median target of $ 17.25”, or about 22% above its current price.

Just because Rocket stocks are 67% below their peak doesn’t mean they’re cheap. With rates on the rise, I don’t see any tangible catalysts for revenue growth in 2022.

About Scott Conley

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