It continues to be more of the same for Rocket Companies (NYSE:RKT). In the week ending July 16, mortgage rates fell for the third consecutive week. That downward move is counterintuitive to Rocket’s underlying business model. Many investors felt RKT stock would benefit from a strong housing market. However, shares of Rocket continue to move lower.
So why isn’t RKT stock going to the moon? There appear to be a combination of factors. First, the company has drawn strong interest from retail investors. There’s nothing wrong with that. But short interest, while down significantly, still sits at around 10%, which is high enough to be a bit uncomfortable.
Perhaps a bigger threat is one of increasing competition. Either way, investors who have waited patiently on RKT stock may have to wait a little longer to see their investment pay off.
Even the Fed Can’t Provide Rocket Fuel
You know things are a bit iffy when the Federal Reserve’s accommodative monetary policy can’t boost your stock. I jest, but only a little. Here’s why. One sure-fire way to cool down the housing market would be a rising interest rate environment. And recently, it hasn’t been rates rising, but more or less the threat that they might rise.
But those concerns have been put to bed by recent Federal Reserve comments. And yet, that hasn’t been enough to get RKT stock out of its doldrums.
Whether or not this indifference is transitory remains to be seen.
RKT Stock Could Use Some Good News
One immediate concern for Rocket is an ongoing lawsuit. The suit contends that the company misled shareholders regarding the threat of rising competition and “other factors” in its last earnings report. For its part, Rocket says the claims are baseless. Nonetheless, anytime the words “securities fraud” surrounds a stock, there is reason for concern.
Another concern is the ongoing price war among wholesale brokers, such as Rocket Companies. To be fair, this affects Rocket’s competitors equally if not more. However, analysts are concerned that it will eat into the company’s bottom line.
The greater concern to me is more of a long-term concern. As disruptive as Rocket was, it’s hard for me to see the company having a defensible moat. That is, I imagine many companies could enter this space.
Is the Housing Market in a Bubble?
Rocket Companies conducted an IPO in late 2020. Like many IPO stocks, Rocket drew the attention of retail investors, and it looked like a solid bet. The housing market was red hot. Mortgage rates were near historic lows. Refinancing activity was through the roof.
I’m not completely unsympathetic to the bearish case about RKT stock. Real estate is a notoriously cyclical sector. I don’t think there are parallels between today and the housing crisis of 2006. However, that doesn’t mean investors aren’t concerned about a housing crisis.
But even if you agree that we’re not likely to see a housing collapse, there are reasons to believe that housing prices may normalize. And if they do, it will put more pressure on Rocket’s already thin margins.
Long-Term Investors Should Take Note
With that said, the housing market is still going strong. And this may be a multiple year cycle that is playing out. If that’s the case, there’s still a long-term case for RKT stock. The company’s revenues have rocketed (no pun intended) during the pandemic. And if the company continues that trend when it reports earnings in August, it could be the jolt the stock needs.
I say this because RKT stock is trading at about half of its normal volume. This isn’t uncommon during the summer. Institutional buying in Rocket stock is very light. However, if the company reports strong earnings, it could be enough to change analyst sentiment. And that could lead to institutional investors jumping on board the stock when they return after the Labor Day holiday.
On the date of publication, Chris Markoch did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
Chris Markoch is a freelance financial copywriter who has been covering the market for seven years. He has been writing for InvestorPlace since 2019.
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