Rocket Falls as RBC Suggests Reddit-Driven Rally Is Overdone

Rocket Cos. fell Wednesday, halting a three-day rally driven by sentiment that the home-loan provider was the latest retail-trader favorite for its high short interest.

The stock fell 33% to $28.01, its steepest decline ever, after RBC Capital Markets downgraded its recommendation to sector perform from outperform, with a price target that suggests a 28% drop from Tuesday’s close. While mortgage demand is expected to continue to boost growth, that is now more than being captured in Rocket’s current valuation, analyst Daniel Perlin said in his report.

Rocket hit an all-time high Tuesday after CNBC mentioned the company as a possible new target among traders discussing stocks on Reddit. The stock has more than doubled since it went public in August and now has a market capitalization of about $60 billion.

Rocket Falls as RBC Suggests Reddit-Driven Rally Is Overdone

“It seems heavy short interest in the stock was exposed, driving a jump at the open and the dam burst once heavy open interest in $30 call options were triggered, fueling another dealer gamma squeeze like we have seen with GameStop,” Neil Wilson, chief market analyst for Markets.com, said in emailed comments.

Rocket carries 46% short interest as a percentage of float, according to S3 analytics. The analytics provider published a report Tuesday identifying exceptionally high trading and option volume for the Detroit-based company’s stock, alongside a large amount of short selling into the rally.

“Evidence of this short squeeze can be shown by the fact that the price was able to drop just as quickly as it moved up, proving that the move was was likely due to artificial demand from short sellers having to buy the stock back once they received margin calls on their positions,” said Jake Wujastyk, chief market analyst at TrendSpider.

Rocket’s jump may have been a matter of time, according to Bloomberg Intelligence analyst Ben Elliott. “Rocket has been a fringe meme stock for a while, so I figured something like this would happen eventually,” he said.

The company’s fundamentals, however, don’t support the 16-17x price-to-forward earnings multiple implied by its March 2 close, Elliott said in a note. “Yet surprisingly resilient earnings may support a re-rating of the massive, tech-focused, nonbank lenders like Rocket and UWM if they keep performing amid rising rates.”

Rocket’s gains, however, signal more than just Reddit mania. With a market value that’s worth more than some of its peers combined, the company has cemented itself as a heavyweight in the emerging mortgage tech sector following an August IPO that was bolstered by retail investors and housing market tailwinds.

Its peers have also gained: Mr. Cooper Group Inc. is up 9.1% this year, while newly-listed loanDepot Inc. has surged 44% since it went public last month.

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