At first glance, Rocket Companies (NYSE:RKT) looks like a sure-fire trading pick. It has a great name, tons of meme energy and solid fundamentals, as well. Rarely do you get the combination of both the Reddit crowd and a strong business with excellent earnings and prospects as well. And yet, RKT stock has failed to launch.
After an abortive short squeeze earlier this year, Rocket crashed. Share dumped below $20 following a weak earnings report and have struggled to reclaim that mark. That leaves Rocket below where it started trading after its initial public offering (IPO) in 202o.
Judging from that, you’d think Rocket was in a slump. It’s not, though. In fact, business is booming. If you’d looked at Rocket at the time of the IPO, you’d be surprised at how strong its earnings look now. And yet the stock is available for merely the same price it debuted at following the IPO. So what explains the price of RKT stock?
Rocket is one of the largest mortgage brokers in the country. That’s a great place to be right now. The Covid-19 pandemic created an unprecedented tailwind for housing. After being stuck at home for the better part of a year, Americans are looking to improve their living conditions. For many people, that means moving from an apartment to a starter home. For other families, the lockdowns showed the benefits of buying a house with another bedroom or two.
Add it all up and Rocket has done record business recently. As a result, it is currently trading at just an 8.7x price-to-earnings ratio. That’s a bargain in general, and especially in the current market where most stocks have soared in recent months.
An important thing to realize is that Rocket gets business both from home purchases and from refinancings. Home purchases have been the big driver of improving business thanks to the post-pandemic boom. However, refinancings are where the trouble for Rocket starts.
With a stock this cheap, it’s helpful to look at risk factors. Is there some concern that would make RKT stock not work out despite the fundamentals looking so good? Indeed, 15% of the company’s float has been sold short at the moment, which suggests that there is a seriously bearish view on Rocket.
It stems from the mortgage market. The housing market and mortgage markets are closely related, of course. However, analysts warn that mortgage originations will slow down even while housing is still hot. This, they predict, will happen because of rising interest rates. That, in turn, would cause Rocket’s business to trail off.
As interest rates rise, fewer people will want to refinance their mortgages. That, in turn, means less business for Rocket and its competitors. Given that backdrop, analysts fear both a slowdown in general and a pricing war among mortgage originators to keep their volumes up.
This could certainly happen, to be clear. Interest rates matter. However, refinancings are unlikely to totally dry up. Housing prices have gone up so much in many markets that people can cash out a lot of equity from their properties even if they can’t lock in much lower of an interest rate. Also, even while refinancings slow, new home purchases should remain strong in coming quarters.
It makes little sense why short sellers are still going after RKT stock. The share price has already declined substantially. And the company, unlike many of the other meme stocks, is not overvalued by any traditional metric. There’s an argument that Rocket’s earnings will fall significantly in coming months and years. But unless the housing market totally implodes, it’s hard to see how RKT stock could slide too much farther from here.
Perhaps Rocket will never blast off to the highs that Reddit trades had anticipated. But the odds favor the shares at least reclaiming most of their recent losses.
The economy is on an upswing and housing demand is sizzling. There will be plenty of opportunity for Rocket ahead, and the stock is priced attractively for fundamental investors here.
On the date of publication, Ian Bezek 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.
Ian Bezek has written more than 1,000 articles for InvestorPlace.com and Seeking Alpha. He also worked as a Junior Analyst for Kerrisdale Capital, a $300 million New York City-based hedge fund. You can reach him on Twitter at @irbezek.
Home Depot is one of the largest importers in the country. Yet with congested ports, container shortages and Covid-19 outbreaks slowing shipments, the company made a decision: It was time to get its own boat.
“We have a ship that’s solely going to be ours and it’s just going to go back and forth with 100% dedicated to Home Depot,” Chief Operating Officer Ted Decker said in an interview. It marks the first time that the company has taken such a step.
Decker said the contracted ship, which will begin running next month, is just one example of the unusual measures that the company is taking as it copes with challenges that have ricocheted across the global supply chain.
On rare occasions, Home Depot has also flown in power tools, faucets, electrical components, fasteners and other “smaller, higher value items” by air freight, he said. In other cases, it has opted to buy items on the spot market — even though it can cost as much as four times more than contracted rates.
Other retailers have also had to go to great lengths to try to stock stores and distribution centers and keep up with consumer demand as the economy recovers from the pandemic. For shoppers, retailers’ logistical woes are playing out in the form of out-of-stocks, long delays before a purchase’s arrival and higher prices.
The global shipping snafus come during an important time for the industry, said Jonathan Gold, vice president of supply chain and customs policy for the National Retail Federation, a trade group. Retailers are heading into peak season for shipping holiday merchandise, which usually begins in August.
“Right now, they are all trying to figure out ‘How do we mitigate that risk to make sure that we’ve got the product here in time for when those holiday season sales start?'” he said. “That could mean moving up timing for when you bring your product in, which could further lead to additional congestion and delays.”
More than a year into the pandemic, Gold said, retailers continue to play whack-a-mole with a revolving set of problems. He said companies have faced those issues, regardless of size and the type of merchandise they sell.
“We’re seeing [issues with] everything from apparel to footwear into furniture, handbags, toys, consumer goods, electronics,” he said.
Soaring demand has contributed to the problem, Gold said, as people have spent money on goods rather than services like dining out and traveling while stuck at home for months.
Home Depot was caught by surprise, Decker said, when consumers’ extreme appetite for home improvement took off during the pandemic. The company has shown big sales growth quarter after quarter. That continued in the fiscal first quarter, with the company’s same-store sales soaring 31% year-over-year.
A Covid-19 outbreak in southern China is a new concern. As Chinese authorities try to stop the spread, they have restricted the number of vessels that can access ports in the major exporting hub. That’s forcing some ships to skip over the ports or anchor offshore as the boats wait to dock. Large shipping companies, such as Maersk, have warned clients about delays. It has caused the biggest backlog since at least 2019, according to a Reuters report.
Costs have risen due to the issues, too. Nathan Resnick, CEO of Sourcify, a company that connects companies to manufacturers, said freight rates have “spiked significantly.” In an interview with CNBC’s “The Exchange” earlier this week, he said the cost of a 40-foot container has gone up over 150% on the West Coast and risen even more on the East Coast.
He estimated that companies may have to raise prices between 5% and 20% to offset that increase. “A lot of that cost may be passed down to consumers where there may be higher prices this holiday season,” he said.
Gold said since the pandemic, coming up with quicker and more efficient ways to move goods across the world has become an urgent priority.
“This really has risen up to the C-suite level, in terms of how are folks mitigating the ongoing challenges that they’re facing right now,” he said.
Among the strategies executives are exploring are diversifying supply chains by importing materials and merchandise from other countries outside of Asia or closer to the U.S., adding air freight to the mix and placing orders even earlier, according to Gold.
For companies like Home Depot, Decker said size has been a competitive advantage. It is the third largest U.S. importer by volume of ocean containers, according to the most recent annual ranking by the Journal of Commerce, a magazine and website that covers global trade. Walmart and Target are the top two U.S. importers and Home Depot rival, Lowe’s, is fourth largest and followed by Ashley Furniture.
“We have a solid, contracted amount of capacity that our suppliers have largely honored,” he said. “[It’s] long-term thinking, ‘Covid doesn’t last forever so keep your best customers happy.’ “