Breaking The Rules For The Long Term

Photo by Sora Shimazaki:

To be honest, there isn’t anything on last week’s insider buying roster that made the cut for us. Inozyme Pharma, Inc. (INZY), a startup biotech came close, but the company is a long way from profitability and an approved product.

Rather than speculating on a biotech that could blow up, in the good and bad sense, we thought it might be a better use of time to lock in on a market leader that’s getting trashed due to poor market conditions.

Rising interest rates, inflation, and potentially cooling of the housing market has Rocket Companies, Inc. (RKT) setting 52-week and all-time lows for the mortgage company. However, as the stock has dropped, Chief Executive Office Jay Farner has been buying stock. The guy you hear on all those Rocket Mortgage radio commercials bought 310,300 shares of RKT since April 30, 2022, for north of $3 million. (1)

Current market conditions and future expectations have Wall Street predicting a major drop for the mortgage company’s earnings per share (EPS) in 2023 compared to 2022. Analysts forecast a consensus profit of $1.09 next year versus $2.26 this year. However, revenue is expected to rise a touch, from $9.15 billion this year to $9.53 billion next year. (2)

Analysts believe RKT could trade to its consensus price target of $12.62 in next 12 months. (3) However, that number is likely to come down if housing market conditions continue to deteriorate i.e. the two Is, interest rates and inflation. Instead, investors might look at Rocket Mortgage as an opportunity to build a position in a market leader.

According to Ian Bezek of InvestorPlace, “Between 2009 and 2014, Rocket grew from 1.3% to 5.1% of the national mortgage origination market. The next few years were quiet for the company, with market share staying at 5% through 2018. Since then, Rocket’s share has soared to 8.8% through full-year 2021.” (4) That’s a big chunk of a fragmented market.

Rocket Companies set its 52-week and all-time low of $8.66 on Friday, April 22nd. Now, there is an old Wall Street cliché that you shouldn’t try to catch a falling knife. In other words, wait for a stock to stop dropping before buying it. Another saying comes to mind too, new lows are usually followed by newer, lower lows.

Investors with short-term plans might be wise to pay heed to Wall Street axioms. Longer-term investors, however, might consider RKY through a different lens. With inflation expected to persist throughout 2022 and the Federal Reserve in the early stages of raising interest rates, mortgage companies could suffer for the foreseeable future.

Investors with a time horizon of at least two-to-three years could consider employing a dollar cost averaging strategy to build a position in Rocket Mortgage. For example, an investor who would normally invest $10,000 per idea could buy $1,000 of RKT a month for the next 10 months. That way, if the stock continues to slide, your $1,000 buys more shares the lower the price and less shares the higher the prices, therefore, lowering your overall cost average.

This approach allows investors the opportunity to acquire stock and build positions in depressed companies over time. Like all cycles, rising rates and inflation will subside. Market leaders like Rocket Companies, Inc. (RKT) should be well positioned to rebound when conditions improve.


1 –

2 –

3 –

4 –