Past missions have been aborted. And the forecast according to various authorities looks questionable. But when it comes to today’s Rocket (NYSE:RKT), are shares on a worthy launch pad for nearby and longer-term stock profits? Let’s see what’s happening off and on the price chart of RKT stock, then offer a well-aligned risk-adjusted determination.
The words “Houston, we have lift-off” as well as “Houston, we have a problem” come to mind when looking at mortgage servicing company Rocket’s brief life as a publicly traded company. In less than a year since debuting last August, shares have traded as low as $16.22 and as high as $41.10. Moreover, the range has been anything but linear with multiple instances of price spikes and crashes in RKT stock.
Much of the stock action in RKT has been driven by earnings releases which, from one quarter to the next, indulged both bears and bulls. Most recently, it’s the bears and fairly high short interest of around 15% who’ve profited from Rocket’s quarterly results issued earlier this month.
RKT Stock and the Headlines
In a nutshell, headline earnings and revenues for RKT’s first quarter offered outstanding and street-topping growth. By the numbers Rocket delivered net income of $1.8 billion, which jumped 170% from the year-ago period. At the same time, revenues of $4.6 billion soared by 236%. Nice, right?
But management cautiously revised its outlook lower given the growing likelihood of rising mortgage rates. Most troubling for RKT bulls was the company’s forecasted gain-on-sales margin which accounts for the gross profit Rocket captures on each loan. In Q2 of last year, the figure stood at 5.19%. Today, it continues to trend in the wrong direction.
If RKT’s forecast is correct, a range of 2.65% to 2.95% will mark a new one-year low for its gain-on-sale margin. More problematic, combined with a projected drop in production volume, Rocket could be facing a drop of 32% in gross margins. Chiming in on that front, InvestorPlace’s Mark Hake sees fair value for RKT shares at $11. But is there a chance bears are too optimistic and RKT bulls too fearfully nearsighted? Possibly.
Home-purchase loans are less rate sensitive than straight-up refinancing of existing mortgages. That’s good news for Rocket. As well, today’s trend of record housing prices means home equity cash-out refinancing is growing. And bearing that in mind, RKT estimates roughly 50% of its loans aren’t negatively obstructed by today’s rate fears.
As much and given what could be more of 50/50 business proposition, it may be an appropriate time to see if all systems are go on the RKT stock price chart for bullish investors.
Rocket’s Weekly Price Chart
Source: Charts by TradingView
As described above, since going public last summer RKT stock has seen its share of blast-offs and failures. The most recent incident as the provided weekly depicts was earlier this year.
In just six sessions beginning at the end of February, shares soared just over 125% from a low of $17.87 into an orbit-like high of $41.10. Even faster, shares then crashed by more than 40% in three trading sessions.
The most recent price abort in Rocket shares was explicitly the most violent in the stock’s history. But as the chart attests, buyers should arguably be prepared for ultra-volatile behavior and undesirable slippage if caught on the wrong side of RKT stock.
The good news today is RKT is stationed just off technical support promoting a triple or quadruple bottom. It could turn into a meaningful launch pad for a longer-lasting bullish cycle.
As for taking advantage of higher prices in Rocket, the advice is simple. Invest for RKT’s upside potential, but don’t get left holding the bag in what could be a value trap beneath long-term price support. There is always the risk bears have it right.
That being said, one smarter and more secure way to exploit this approach is using a married put strategy.
The married put consists of a long put and long stock position packaged together on a one-to-one ratio. This type of spread offers crash protection, as well as an open-ended profit profile should RKT stock lift-off. One such married put which looks suitable for purchasing, both off and on the price chart, is the January $18.89 combination for roughly $21.25 per spread.
On the date of publication, Chris Tyler 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.
Chris Tyler is a former floor-based, derivatives market maker on the American and Pacific exchanges. For additional market insights and related musings, follow Chris on Twitter @Options_CAT and StockTwits.