The Good News for Rocket Companies Doesn’t Make the Bad News Less Bad

Stock Market
  • Down 62% from its 52-week high, Rocket Companies (RKT) stock may be reaching a bottom.
  • Unfortunately, rising interest rates are having their intended effect on the housing market.
  • RKT stock is a hold for only the most patient, long-term investors.

Trading at just $8.59 at the start of May 24, Rocket Companies (NYSE:RKT) stock is down 62% from its 52-week high. The good news is that since closing at $7.40 on May 11, RKT stock is up 16%. It would be outperforming the broader market simply by being in the green. So a 16% gain should not be easily dismissed.

Unless it should. The reason why RKT stock fell to such an anemic level is a first quarter earnings report in which the company missed on both the top and bottom lines. And on a year-over-year basis, the numbers tell a story that the housing market is becoming much weaker. As long as that trend continues, the upside for Rocket Companies looks fairly small.

RKT Rocket Companies $8.75

Interest Rates Will Rise Until Demand Is Destroyed

The mythical Captain Bligh is attributed with the phrase, “the beatings will continue until morale improves.” But investors can put a twist on that phrase as an apt description for the Federal Reserve’s true intentions.

The Fed has now raised interest rates twice this year. And according to Fed chair Jerome Powell, it’s just getting started. Powell fell short of using the “whatever it takes” line, but his message to the markets had the same effect. The Federal Reserve views inflation as public enemy number one.

But what the Fed is really saying is that they will keep raising rates until consumer demand gets to a level where prices come down. Will that lead to other problems? I’ll leave that for others to decide.

As it relates to Rocket Companies, the company’s size and first-mover advantage won’t mean as much if homeowners are priced out of the market and/or existing homeowners decide the benefit to sell no longer exists.

Analysts Have Been Sour on Rocket Companies

Last summer, I encouraged caution for investors regarding Rocket Companies. The reason for my caution was that RKT stock price was falling even as the housing market was on fire. Furthermore at the time, Rocket Companies got a sell rating from two analysts.

By itself that’s significant. However, consider that only about 10% of stocks receive a sell rating. There’s no clear consensus as to why that is. But suffice it to say that analysts don’t issue sell ratings lightly. In fact, a hold has become the equivalent of a sell in many cases. And currently RKT stock has 12 hold ratings out of 16 analysts.

My point is that analysts were skeptical of Rocket Companies when the housing market was strong. So there’s little reason to believe its fortunes will improve in a tighter housing market.

RKT Stock Is a Hold For Patient Investors

Rocket Companies illustrates the risk of buying cyclical stocks. The housing market is notoriously fickle, and right now the bears are coming out in full force. That being said, RKT stock seems to be firmly in the hands of traders. With short interest above 24%, this is one for long-term investors to stay away from at the moment.

But when that short interest comes down, the stock is cheap enough to hold a small position and wait for the market to turn around. Of course, since a hold may be as good as a sell, you can do with that information what you wish.

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 over five years. He has been writing for InvestorPlace since 2019.

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