After GameStop-like surge, Rocket stock frenzy shows signs of subsiding
The wind in the sails of Rocket Companies — i.e., retail investors on Reddit — that inflated the company's shares 71% Tuesday showed signs of diminishing a day later.
After closing at $41.60 per share the day before, shares in the Detroit-based mortgage holding company backed by billionaire Dan Gilbert slumped nearly 33% on the day to $28.01 at the market close Wednesday.
Despite a buzz mirroring the frenzied trading of GameStop Corp.'s shares last month, the slowdown in Rocket shares tracks with the expectations of experts. In a few months, they say, retail investors will have moved on to another company's stock — and Rocket, a profitable company amid low interest rates and strong home sales, will proceed with business as usual.
The upshot: such major shareholders as Gilbert, as well as long-term investors in the company (which includes mortgage-lending powerhouse Rocket Mortgage), might stand to make some money off the surging shares should they choose to sell. Rocket did not immediately respond to a request for comment.
Rocket's blast upward pushed Gilbert, the company's majority shareholder, up 19 spots to No. 16 on the Bloomberg Billionaires Index of the world's 500 wealthiest people, which pegged his increase in net worth at nearly $25 billion. That would make his overall net worth more than $64 billion.
But that gain (barring any sell order, which eventually would be disclosed in required regulatory filings) is only on paper. And any apparent windfall could disappear as Rocket shares pull back, erasing nearly half the previous day's gains in a single trading sessions.
"That's a fun number," said Erik Gordon, a professor at University of Michigan's Ross School of Business, "but it's not a real number."
Quarterly securities filings will eventually reflect whether insider shareholders sold any of their shares. Experts said that while it's possible Gilbert and other executives unloaded some shares, they could not have sold large positions without negatively affecting the price. There also are regulations governing when and how executives can trade.
"I'm certain that when we look back at the end of this quarter's filings, you're going to see that a lot of shares were sold, probably (Tuesday), and then rebought ... next week," predicted Mike Windle, a financial advisor and owner of Plymouth-based Custom Wealth Solutions. "The insiders ... they're the ones making out on this; it's not the Robinhood investor that bought in at 2 o'clock yesterday once they found out what was happening."
The activity around Rocket's stock is reminiscent of the GameStop saga, which pitted short-sellers against retail investors spurred on via the WallStreetBets forum on Reddit. Rocket's stock recently has been heavily shorted, a sign that some investors think the stock is overpriced.
Where the situations diverge, however, is that retail investors who bought GameStop stock were partly motivated by a desire to help buoy the company. They bought stock in a bid to fend off hedge funds and raise capital for the struggling, brick-and-mortar-heavy business. GameStop's stock rose much more significantly than Rocket's — in late January notching a more than 1500% gain — and still remains well above the levels where it typically trades.
"Obviously Rocket isn't that," said Windle. "They don't need saving."
Instead, experts like Gordon predict retail investors will quickly move on from Rocket: "A year from now, (retail investors will) be focused on another company and Rocket will be Rocket and it's stock price will depend on how well the company is doing — not what people post on Reddit. In between, it's a lot of noise."
The spike might have proven profitable for Rocket investors who opted to sell off some of their shares while it was booming. For retail investors who jumped in during the surge, some could stand to win big while others could stand to lose a lot, experts said.
Asked about the recent trading activity during a virtual event at Morgan Stanley's 2021 technology, media and telecom conference Wednesday, Rocket CEO Jay Farner said the situation was "interesting" and noted the company's strong earnings report last week in which the company said it made a $9.4 billion profit in 2020.
"A lot of this, for me, is really the recognition of the Rocket Companies' platform," he said. "You've heard both from investors and folks on the television set starting to really discuss Rocket as a tech platform, which is what we've been building for 35 years now."
The company is optimistic about 2021, as well. In addition to continued growth on the mortgage lending side of the business, Farner said he expects Rocket's real-estate platform to double this year, and for the company to see significant growth in its auto platform. Farner also highlighted the company's strong client retention rate of more than 90% as a key driver of scale and profitability.
"We are very bullish on where Rocket Companies is headed," he said, "and we'll keep making all the right decisions to continue to grow the company."
He said, too, that company executives, including him and Gilbert, "own roughly 94%, 95% of the company. We believe in its future and we have not sold shares ... since we went public, because we believe strongly in the future of what we're building."