Rocket Mortgage stock surges thanks to Wall Street Bets

Rocket Companies Chairman Dan Gilbert may want to gift some karma to users of the infamous subreddit Wall Street Bets.

His company’s stock soared nearly 100% on Tuesday after the day traders at the subreddit took interest in the mortgage lender’s stock, which had been hovering around the $20 mark for much of the past three months.

Nearly 40% of the company’s available shares are sold short, according to Market Beat, and it’s one of the most shorted companies by hedge funds on Wall Street. As of 3:15 p.m. EST on Tuesday, the stock was trading at $41.90.

Tuesday’s jump put Rocket on track for its best day ever since its IPO in early August.

Rocket Mortgage bears little resemblance to the companies Reddit day traders had previously targeted, such as Gamestop. Unlike Gamestop, the lender is highly profitable.

In 2020, the mortgage lender originated about $320 billion worth of mortgages, and pulled in $9.5 billion in earnings. It is easily the largest lender in America, and certainly the best well known, having spent billions on marketing.

Still, investors haven’t been terribly enthused with the Detroit-based lender for most of its time as a publicly traded company. Though it traded at a premium over most mortgage competitors – and at one time traded around $34 a share – up until this week, Rocket’s stock barely nudged above its debut price in August of $18. The largest institutional shareholders include Invesco, Vanguard funds and Blackrock.

Gilbert and his employees own 94% of the company, according to Securities and Exchange Commission filings.

Beyond the standard refrain that mortgage is a highly cyclical industry that depends hugely on interest rates, analysts on the company’s fourth-quarter earnings call pointed to the company’s shrinking margins and dependence on refinance business as reasons for caution.

Rocket, which was founded in 1985, has shown resiliency. While it’s gain-on-sale margin slipped to 4.41% in the fourth quarter from 4.52% in the third quarter, that’s still a much shallower drop than its competitors. The company’s projection of between $98 billion to $103 billion in originations for the first quarter of 2021, and gain on sale margins of between 3.6% to 3.9% would still be better than most of its competitors.

Rocket also announced during its earnings call that it had struck a partnership with Morgan Stanley and E-Trade to originate and service conventional mortgages for their millions of clients, which could significantly boost its purchase business. Given the uptick in interest rates of late, investors will likely be pleased to hear of new pipelines to capture purchase business.

At its quarterly earnings call, Rocket said its board of directors approved a significant special dividend of $1.11 per share for shareholders.

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