Rocket stock has surged more than 100% since the company reported earnings last week.
Gabby Jones/BloombergRocket Cos. stock headed back to Earth on Wednesday morning, after shooting up 71% the day before. Trading in the stock was halted several minutes after Wednesday’s open due to volatility.
Rocket’s 109% gain since the mortgage originator reported earnings last week means high demand for mortgages “is more than being captured in the current valuation,” wrote RBC Capital Markets analyst Daniel Perlin in a Wednesday note. Perlin downgraded Rocket. (ticker: RKT) to the equivalent of Hold from the equivalent of Buy, while restating a $30 price target for the stock.
As of mid-day Wednesday, Rocket stock was trading at $31.56, down about 24% from the previous day—but about 28% higher than the average analyst price target of $24.64, according to FactSet.
The downgrade follows “a strong quarter late last week and abnormal volatility in the shares,” Perlin wrote. “We believe the risk/reward is now more balanced, if not skewed to the downside.”
The downgrade has little to do with the larger economic picture or company operations. Perlin wrote that Rocket’s operating leverage is expected to remain positive through 2021, and highlighted the company’s special dividend of $1.11.
“We believe management’s willingness to share in the near-term outperformance, given the strength in the mortgage market, bodes well for additional capital allocation opportunities in the future,” he wrote. Mortgage demand is also expected to continue, Perlin wrote—but that is reflected in the stock price.
Rocket’s rise Tuesday was the latest in a wave of heavily-shorted stocks experiencing steep gains. With 39.73% of available shares shorted, Rocket stock is among the most shorted. A short position is when an investor borrows and then sells shares in a bet that the stock will fall.
Rocket wasn’t the only mortgage company to see shares soar this week. UWM Holdings (UWMC), a wholesale mortgage lender that went public via SPAC in January, gained 12.2% Tuesday, and rose another 9.3% Wednesday.
Representatives for Rocket and United Wholesale Mortgage did not immediately respond to request for comment, but Rocket CEO Jay Farner commented on recent trading during a conference presentation Wednesday . “The stock yesterday and over the last few days, really interesting to see for us,” Farner said, according to a Sentieo transcript of the event. “A lot of this for me is really the recognition of the Rocket company’s platform.”
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