Rocket Companies Inc. this week is being targeted by Reddit day traders who drove up the cost of shares in GameStop Corp. But unlike the beleaguered video game retail chain, experts say the online mortgage lender’s underlying business fundamentals are much stronger.
On Tuesday, shares in the Detroit-based parent company of billionaire Dan Gilbert’s Rocket Mortgage closed up 71% to $41.60. Like GameStop, Rocket is among the most shorted stocks in the market, with investors betting that the share price will fall — a pain for bullish retail investors on the WallStreetBets subreddit forum that have joined together to pump up the price of America’s largest mortgage originator.
Where Rocket’s gains diverge from the GameStop saga, however, is that the frenzy around the Texas-based retailer — which, despite making moves to re-orient itself around e-commerce, continues to be bricks-and-mortar focused — was largely divorced from its business prospects. By contrast, Rocket is enjoying record profits since going public in August amid historic low interest rates and the distribution of trillions of dollars in stimulus during the COVID-19 pandemic.
“These actions have created a new housing boom as people rush to refinance or take out new mortgages at historically low rates,” David Kudla, CEO of Grand Blanc-based Mainstay Capital Management, said in an email. “Rocket Companies stands to benefit in this environment. While the GameStop saga didn’t have a lot of fundamental reasoning behind it, the situation with Rocket Companies may play out differently.”
Competitors also rode the wave: Pontiac-based United Wholesale Mortgage Holdings Corp. closed up almost 20% to $9.13, a signal the updraft lifting Rocket may be more broadly based and more focused on fundamentals in the mortgage business.
Rocket on Tuesday was the stock with the second-most mentions on Reddit, the social media platform that started the rally driving GameStop up 1,500% over two weeks in January to squeeze out short-sellers. These surges fueled by social media sentiments have created a band of “meme stocks.” Struggling cinema chain AMC Entertainment Holdings Inc. is another.
Rocket is the ninth most shorted stock, according to MarketWatch, with almost 40% of its available shares being sold short mostly by hedge funds. That is 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 money.
“When people see that, they think you can bust the sellers,” Jim Cramer, the prominent investor and market commentator, said on CNBC. “I have been a huge fan of (Rocket CEO) Jay Farner and (Chairman) Dan Gilbert … and frankly don’t understand why the stock did not react to what was a very good quarter where they basically laid out a story that just said, ‘We can show how when rates go up, it has not hurt our business. When rates go down, it’s not hurt our business.’”
For refinancings especially, the lender is reliant on interest rates, which are increasing from January’s record lows.
“It’s selling at a higher price-to-earnings ratio than its competitors,” Jay Ritter, a finance professor at the University of Florida, also noted about Rocket. “Some investors are of the opinion that the earnings-to-price ratio is too big.”
Rocket did not respond to request for comment Tuesday, but it may also be doing its own work to clear out the short sellers. It announced a dividend of $1.11 per share to be paid later this month: investors with a short position must pay the dividend to the company as opposed to receiving it, according to federal rules.
Rocket has helped to revolutionize its industry, offering a fully online way to get a mortgage. The company last week recorded a record $9.4 billion in profit on $15.7 billion in revenue in 2020 amid a housing and refinancing boom. That was up from a profit of $897 million on revenue of $5.1 billion in 2019.
Short sellers lost about $860 million from Tuesday’s surge alone, bringing the total to more than $1 billion in 2021, according to Ihor Dusaniwsky, managing director of predictive analytics at analytics firm S3 Partners LLC.
“We once again are seeing a long buying vs. short selling battle,” he wrote in a research note. The activity, however, likely is not entirely driven by Reddit: “We are also seeing value investors buying RKT stock based on their better than expected (first) quarter guidance and strong mortgage activity. Short sellers may be outnumbered and out gunned in this battle and the short squeeze may come sooner rather than later.”
Rocket had its best trading day since its initial public offer in August. Tuesday’s close was up 131% since its $18 IPO, though the price was falling in after-hours trading.
Rocket executives, while sharing 2020 financial results last week, were optimistic about the first quarter of 2021. They forecast closed loan volume total between $98 billion and $103 billion, an increase of at least 90% year-over-year.
“It would be a shame for Rocket to become a gamer plaything,” Erik Gordon, a professor at University of Michigan’s Ross School of Business, said via email. “It is a real company that has done well for years by investing in innovation. It deserves to be priced on its prospects.”
Investors have sold short 49.7 million Rocket shares, according to S3 Partners. The value of short position shares not closed out yet was $1.21 billion. Shorted shares are up 8.2% since last week.
Meanwhile, GameStop’s stock continues to trade at above-normal levels. Still, the share price of $116.93 at market’s open Tuesday was far below the high of more than $400 it reached in late January.
“It’s making the stock market more casino-like,” Ritter said of the meme stocks, “which is not good for companies that are raising capital or that use the stock market to raise capital. If investors think that they are going to hold the stock that is being valued not on the basis of fundamentals but on the basis of luck, serious long-term investors are going to be less willing to buy the stock.”