RKT stock: below its IPO price of $ 18, Rocket is a great bet against the tide

Mortgage maker Rocket companies (NYSE:RKT) is currently in the midst of what can only be described as a major trade crisis. Since May 5, RKT stock is down almost 25%.

Source: Lori Butcher / Shutterstock.com

Rocket’s stock hasn’t traded this low since going public at $ 18 in august 2020. The fact that its initial public offering (IPO) cost two dollars below its pre-IPO low of $ 20 to $ 22 should have been all investors needed to know about the future direction of its share price.

As of this writing almost 10 months later, it is trading slightly above $ 17. You can get it back for less than what the IPO investors paid for their shares.

InvestorPlace’s Larry Ramer recently explained why investors should avoid RKT stocks. While I understand my colleague’s concerns, I think there is a contrarian point of view to be had when it comes to Rocket.

After falling as much as in the past few weeks, it is possible that many of the potential headwinds that Rocket and the housing market face may not materialize. If you’re taking risks, here’s why now might be the best time to buy RKT stocks.

Is RKT’s stock ready to take off?

The headwinds my colleague mentions in his article include rising inflation, higher interest rates, lower housing starts, material shortages and the migration of Americans to the suburbs. They are listed in no particular order of consequence.

I just wanted to highlight the fact, as my colleague sees it, that the current economic environment is not a slam dunk for Rocket to grow in business over the next 12-24 months.

There are potential risks here. If there hadn’t been, it wouldn’t have gone down 25% as quickly as it did. Remember, the markets are a barometer of what will happen in six months or a year, not what is happening now.

Among the concerns raised by Ramer, it’s clear that higher interest rates are what most investors will focus their attention on. As Larry pointed out, Baron Fund exited his position in RKT because he could not justify keeping the growth stock in a higher interest rate environment.

Another one Investor place contributor Mark Hake said at the end of April that Rising Interest Rates Could Crash For Rocket. Since Merlu made this assumption, RKT’s stock is down 20%.

But what if they were wrong? What if inflation dies, shortages disappear, housing starts rise, and interest rates remain historically low? Rocket takes off like at the beginning of March.

What happened in March?

It’s a good question. It had been a while since I had thought about Rocket’s stock. The last time I discussed RKT was in September 2020. I recommended it plus nine other new stocks that I thought were worth considering for your portfolio.

In early March, thanks in large part to Reddit’s short-squeeze craze, Rocket stock gained 75% in just one day. contrary to GameStop (NYSE:GME), he was unable to keep much of his Reddit-inspired earnings.

And now that investors are worried about interest rates, all bets on stocks appear to be canceled. At the time of the short-squeeze in early March, Rocket’s short interest was 47.9 million shares. This represented almost 46% of the public float at the time.

Where is he today?

Well, according to Market surveillance, Rocket’s short interest, as of May 14 was 19.36 million shares, or 15% of its free float. That’s a third of what it was at the start of March.

You might think that’s a bad thing, given the amount of gas added to the fire with a short squeeze, but it isn’t. Investors are spending too much time reading the tea leaves when it comes to Rocket.

As long as there is a shortage of homes – according to Freddie Mac, 3.8 million households need to be built today to meet the country’s demand – there will be a commensurate need for large mortgage lenders such as Rocket.

Unless you’re a Rockefeller (or a real estate investor), you’ll likely need a mortgage to finance the purchase. Higher interest rates can discourage some people from buying, but the reality is that most people buy a home for lifestyle reasons, not because they can get a really low mortgage rate.

If this were not the case, no one would have bought a house in 1981, when the average mortgage rate was 16.64%. According to the American Enterprise Institute, sales of existing homes are down 50% between 1978 and 1981. But that still meant that two million existing homes were sold that year, with many buyers withdrawing money from a 17% mortgage. New home sales fell by a similar amount.

So, yes, higher interest rates can reduce the demand for mortgages. But at the 1981 level? No chance.

The result on RKT Stock

On Rocket’s first quarter 2021 conference call, CEO Jay Farner explained how interest rates affect its overall activity.

“While rate and term refinancing activity has been very high in the low interest rate environment of 2020, Rocket has historically had a balanced mix of fixtures,” said Farner.

“For example, over the past four years, including 2020, half of our cumulative volume has come from these less rate sensitive products.”

I invite you to read his comments. It might not change your mind, but at least it will make you consider the other side of the argument.

We have had low interest rates for so long; it has become impossible for investors to imagine a successful business in an environment of higher interest rates. But they can and will do it with proper forethought and planning.

Is RKT stock risk free at $ 17? Of course not. It’s much more attractive, however, at current prices than at $ 41.

If you are a speculative investor, I wouldn’t hesitate to bet Rocket as a teenager.

As of publication date, Will Ashworth did not hold (directly or indirectly) any position in the securities mentioned in this article. The opinions expressed in this article are those of the author, subject to the InvestorPlace.com Publication guidelines.

Will Ashworth has been writing about investing full time since 2008. His publications include InvestorPlace, The Motley Fool Canada, Investopedia, Kiplinger and several others in the United States and Canada. He particularly enjoys creating model portfolios that stand the test of time. He lives in Halifax, Nova Scotia. As of this writing, Will Ashworth does not hold a position in any of the aforementioned securities.

About Jermaine Chase

Check Also

Note to money lenders – Government proposes to lower usury rate caps by end of 2022

This is an offense under the Money Lenders Ordinance (Cap. 163;”MLO”) to lend or offer …