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Rocket Companies: Beware, Short-Squeezers - The Law Of Supply And Demand Has Not Been Overturned

Mar. 04, 2021 2:05 PM ETRocket Companies, Inc. (RKT)117 Comments
Gary J. Gordon profile picture
Gary J. Gordon


  • The recent short squeeze is not a sign of a permanently higher stock, but an aberration.
  • Mortgage banking supply and demand is increasing out of balance.
  • Demand will drop 40% or so as the current refi boom dies.
  • Meanwhile, competition is increasing.
  • The result is rapidly declining profit margins along with declining volume.

I wrote my first piece on Rocket Companies (NYSE:RKT) for Seeking Alpha several weeks ago. My article said that while I believed Rocket Mortgage was a very well-run company, the supply/demand dynamics of the mortgage banking business were turning quite negative. In my view, the stock didn't fully reflect that problem. I therefore recommended waiting for a lower entry point to invest in the stock.

Several commentators on my article pointed out that the publicly traded stock (only 6% of total shares, the rest held by the founders) was heavily shorted, and as such subject to a short squeeze. Boy were they right; the stock nearly doubled in the last hour of trading on March 2, apparently after this fact was noted on CNBC.

Dear reader, I am a value investor. I don't watch 90-day moving averages. I don't care about insider buying or selling. I don't check momentum or what's being said on Reddit. If that's how you roll, Godspeed, but I am of no help. As a value investor I focus on one issue - what is the present value of my estimate of future earnings of the company? If the present value I calculate exceeds the current stock price by a sufficient margin, I buy. If the reverse, I at least consider shorting. That's it.

The March 2 short squeeze certainly made a lot of money for those holding the stock at the time. But I strongly suggest that if you still own it you should sell it. The present value of Rocket's future earnings does not come close to justifying the current stock price of, at last look, $28. The problem remains the growing supply/demand imbalance for mortgage banking.

The mortgage banking demand problem - Refis are dying

A mortgage banker gets to originate a home

This article was written by

Gary J. Gordon profile picture
Gary Gordon’s career was on Wall Street, where he was a stock analyst covering the housing, mortgage and consumer finance industries. He also served as a U.S. investment strategist and as a portfolio manager. The bulk of his work career was at PaineWebber and UBS. He is now retired. Mr. Gordon is an adjunct professor at Mercy College in New York. He teaches economics on campus and math at prisons (Sing Sing and Taconic in New York). He also presents financial literacy seminars to adults and students. He is on the Board of Hudson Link (college education for incarcerated men and women) and the Baron de Hirsch Fund. Mr. Gordon is married with two young adult children. He has degrees from Colgate University (BA '74, philosophy) and The Wharton School (MBA '77, finance).

Analyst’s Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

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