The wind in the sails of Rocket Companies – i.e. retail investors on Reddit – which has inflated the company’s revenue shares 71% on Tuesday showed signs of shrinking a day later.
After closing at $41.60 per share the previous day, shares of the Detroit-based mortgage holding company backed by billionaire Dan Gilbert fell nearly 33% on the day to $28.01 at the close of trading. Wednesday market.
Despite buzz reflecting frantic trading in GameStop Corp. last month, Rocket’s downturn shares the tracks with pundits’ expectations. In a few months, they say, retail investors will have moved on to another company’s stock – and Rocket, a profitable company in an environment of low interest rates and strong home sales, will carry on business as usual. .
The result: Major shareholders such as Gilbert, as well as long-term investors in the company (which includes mortgage powerhouse Rocket Mortgage), could make money from the stock surge if they choose to sell. Rocket did not immediately respond to a request for comment.
Rocket’s upward explosion pushed Gilbert, the company’s majority shareholder, up 19 spots to No. 16 on the Bloomberg Billionaires Index of the 500 richest people in the world, which pegged the increase in his net worth at nearly $25 billion. This would bring his overall net worth to over $64 billion.
But this gain (excluding any sell orders, which would eventually be disclosed in required regulatory documents) is only on paper. And any apparent bargain could disappear when shares of Rocket pull back, wiping out nearly half of the previous day’s gains in a single trading session.
“It’s a fun number,” said Erik Gordon, a professor at the University of Michigan’s Ross School of Business, “but it’s not a real number.”
Quarterly securities filings will eventually indicate whether insider shareholders have sold any of their shares. Experts said that while it’s possible that Gilbert and other executives unloaded some stocks, they couldn’t have sold large positions without negatively affecting the price. There are also regulations governing when and how executives can trade.
“I’m sure when we look back to the end of this quarter’s filings, you’re going to see a lot of stocks sold, probably (Tuesday), then bought back…next week,” Windle predicted. , financial adviser and owner of Custom Wealth Solutions, based in Plymouth. “The insiders…they’re the ones realizing it; it’s not the Robinhood investor who bought at 2pm yesterday once they found out what was going on.”
The activity around Rocket shares is reminiscent of the GameStop saga, which pitted short sellers against retail investors stimulated via the WallStreetBets forum on Reddit. Shares of Rocket have recently been heavily shorted, a sign that some investors believe the stock is overvalued.
Where the situations diverge, however, is that the retail investors who bought GameStop stock were partly motivated by a desire to help support the company. They bought shares in a bid to ward off hedge funds and raise capital for the struggling, brick-and-mortar company. GameStop’s shares rose much more significantly than Rocket’s – in late January, recording a gain of more than 1500% – and still remain well above the levels where they typically trade.
“Obviously Rocket isn’t that,” Windle said. “They don’t need to be saved.”
Instead, pundits like Gordon predict that retail investors will quickly leave Rocket: “A year from now, (retail investors will be) focused on another company and Rocket will be Rocket and the stock price will depend on the performance of the company – not what people post on Reddit. Between the two, there’s a lot of noise.”
The spike could have proved profitable for Rocket investors who opted to sell some of their shares while it was in full swing. For retail investors who jumped during the surge, some could gain big while others could lose big, experts said.
Asked about recent business activity during a virtual event at Morgan Stanley’s 2021 Technology, Media and Telecommunications Conference on Wednesday, Rocket CEO Jay Farner said the situation was “interesting” and noted that the company strong earnings report last week in which the company said it made $9.4 billion in profit in 2020.
“A big part of that for me is really the recognition of the Rocket Companies platform,” he said. “You’ve heard from both investors and TV people starting to really discuss Rocket as a technology platform, which we’ve been building for 35 years now.”
The company is also optimistic for 2021. In addition to continued growth on the mortgage side of the business, Farner said he expects Rocket’s real estate platform to double this year and the company experiencing significant growth in its automotive platform. Farner also pointed to the company’s strong customer retention rate of over 90% as a key driver of scale and profitability.
“We are very optimistic about the direction Rocket Companies is taking,” he said, “and we will continue to make all the right decisions to continue to grow the business.”
He also said that the company’s executives, including himself and Gilbert, “own about 94%, 95% of the company. We believe in its future and we haven’t sold any shares…since we went public, because we firmly believe in the future of what we are building.”