Everyone's down on the housing market, and why not?
This week's New Home Sales report came in lower than expected. Average mortgage rates are hovering near their highest levels since 2000. Home prices just set a new all-time high in May.
I could go on, but that's not the point. I'm here to talk about a long-term opportunity for a housing-related company and its stock.
Rocket Companies (RKT)
If you're not familiar with them, this Detroit-based company offers a range of personal finance and consumer services. Rocket is mainly known for Rocket Mortgage, a leading mortgage lender in the U.S. They went public in August 2020 and trade under the ticker RKT.
With introductions out of the way, let's dive into why Rocket Companies is this week’s Fast Profit Trade Idea.
Fundamentals: Neutral to Bullish
Yes, interest rates have slowed the mortgage finance business. According to the Mortgage Bankers Association (MBA), mortgage applications are down 27.8% compared to the same period last year. The reason? A deadly combination of high housing prices and high inflation.
The market has dried up. Homeowners don't want to sell because they'd pay top dollar for their next house and likely face higher rates. Would-be buyers are waiting for the market to cool and rates to drop. It's a game of chicken, but something will change. When it does, companies like Rocket will get busy, fast.
In the meantime, Rocket’s fundamentals show a company improving profitability and grabbing market share.
Last quarter, they generated $1.16 billion in revenue, beating Wall Street expectations. That's a 32% increase over the same period last year and the best growth since their first year.
Their earnings report came with lower-than-expected guidance, yet the stock rallied 20% over the next month. Why? Because everyone expects companies in the mortgage market to lower their outlooks given the current rates and prices.
Rocket’s current guidance still predicts $1.12 billion in revenue this quarter, about 10% lower than a year ago.
Sentiment: Bullish
Market sentiment towards Rocket's stock is surprisingly lenient given the business environment. Wall Street analysts have lowered the bar. Currently, none of the 15 analysts covering the stock recommend it as a Buy.
For comparison, Wells Fargo (WFC), US Bank (USB), and Loan
Depot (LDI) have analysts recommending them as Buys. Even Loan Depot has one Buy recommendation out of three analysts.
Wall Street’s stance on Rocket will change. The market still projects a high possibility for two interest rate cuts by the end of 2024, with more in 2025. Analysts will start upgrading Rocket as soon as these rate cuts become likely.
Analysts also need to revise their price targets. The average target for Rocket is $11.84, about 15% below its current price. This suggests the stock is ripe for a price target upgrade, which will attract buyers.
Expect some analysts to act ahead of or right after Rocket’s next earnings report on August 1.
Short sellers have also bet against Rocket, with a short interest ratio of 7.2. This means it would take over seven days for shorts to cover their positions, indicating a potential short squeeze. Almost 15% of Rocket’s shares are tied up in short positions, adding to the stock's bullish volatility when a squeeze happens.
The market has set a low bar for Rocket, making it easier for the stock to impress investors. When it does, expect a surge of buyers.
Technicals: Bullish
Rocket’s long- and short-term price charts show bullish trends. In March, Rocket’s 50-day moving average turned bullish, trending higher after hitting 2024 lows at $11 in February.
The last bullish trend emerged in December 2024, pushing the stock from $9 to $15 in one month. This was driven by speculation of Fed rate cuts, which haven't happened yet but show the buying potential when rate cuts are anticipated.
Rocket shares have faced resistance at $15 four times since December, making this a “Trigger Price.” A breakthrough at $15 will likely trigger:
- Analyst upgrades
- Increased price targets
- Short sellers covering positions, causing a short squeeze
The target for this buying activity is $20 over the next four to six months, with a longer-term chart suggesting a higher target of $22.50.
Rocket’s stock moved into a long-term bull market trend in November 2023. This marks the first technical long-term bull market trend since its IPO in 2020.
From the monthly chart perspective, an improvement in the fundamental picture for Rocket’s industry, along with a shift in investor sentiment, turns the chart target to $22.50.
That’s an aggressive 65% move from its current price, but we’re talking about a stock that the market appears to be waiting to jump on. This is a simple case of getting in front of a crowd.
Here's how to position for Rocket’s bull run:
- Stock investors might add the stock to a portfolio at current prices with a stop-loss strategy if shares drop below their 200-day moving average or $12.
- Long-term bulls could consider a LEAP option expiring in 2026. For example, the $12 call expiring on January 16, 2026, is priced at $4.20 per contract. If Rocket hits $22.50 before June 27, 2025, the option could have a theoretical value of $10.90, a 160% gain.
Always ensure you have the necessary education and understand the risks involved when trading options.
About the Author
Chris Johnson (“CJ”), a seasoned equity and options analyst with nearly 30 years of experience, is celebrated for his quantitative expertise in quantifying investors’ sentiment to navigate Wall Street with a deeply rooted technical and contrarian trading style.