Shares of Rocket Cos. tumbled Wednesday toward their worst day in 14 months after Keefe, Bruyette & Woods analyst Bose George turned bearish, citing valuation and the company’s weakness in the home-purchase market. Rocket Cos. is the parent company of Rocket Mortgage.
“We expect mortgage volumes to remain weak in 2024, but to the extent they come in stronger than currently expected, higher volumes are likely to be driven by a stronger purchase market,” George wrote in a note to clients. “We believe that [Rocket’s] weaker position in the purchase market puts it at a relative disadvantage to peers in the near-to-medium term.”
George cut his rating on Rocket’s stock
RKT,
to underperform, after being at market perform since May 2022. He set the stock-price target at $10.75, which implies about 19% downside from current levels.
The stock dropped 7.4% in afternoon trading, the biggest one-day selloff since it shed 7.6% on Nov. 16, 2022. It has fallen 12% amid a four-day losing streak, which would be the longest such streak since the eight-day stretch that ended Sept. 26, 2023, according to Dow Jones Market Data.
Many on Wall Street define a decline of at least 10% to up to 20% from a bull-market closing high as a “correction,” while declines of at least 20% are viewed as bear territory.
The correction in Rocket’s stock comes after it shot up 95.9% over the last two months of 2023, closing at a two-year high of $15.04 on Dec. 27. Growing optimism that the Federal Reserve may start lowering interest rates in 2024 fueled hopes that falling mortgage rates would help “unfreeze” the housing market.
The stock soared 106.9% in 2023, the first yearly gain since the company went public in August 2020. In comparison, shares of rival LendingTree Inc.
TREE,
climbed 42.2% last year, and the S&P 500 index
SPX
rose 24.2%.
Read: U.S. mortgage rates fall for eighth week in a row, drawing buyers off the sidelines.
George said the recent rally in the stock is “not justified,” because he doesn’t expect Rocket’s earnings to benefit much from the recent decline in mortgage rates.
George also believes Rocket will be hurt by the mortgage-refinancing market, which he said is expected to remain very weak in 2024. Rocket’s share of that market — about 10.5% — is much larger than its roughly 3.5% share of the purchase market. George estimates that only 5% of the mortgage universe is currently at rates high enough to make refinancing profitable.
“This reliance on the refinance market made the company the number one originator during the refinance boom in 2021, but the company’s market share has fallen meaningfully since then as refinance activity has plummeted and peers with greater exposure to the purchase market have grown market share,” George wrote.
Of the 14 analysts surveyed by FactSet who cover Rocket, George is one of four who are bearish, while the other 10 are neutral. The average stock-price target is $9.67.
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