Choosing between Berkshire Hathaway (BRK.A 0.32%) (BRK.B -0.06%) and Rocket Companies (RKT 4.18%) is a choice between the venerable conglomerate with a portfolio of companies that are tried-and-true stalwarts, and the scrappy, fast-growing upstart that dominates its space. For an investor, which one represents the better buy? 

Picture of a rocket launch

Image source: Getty Images.

Two different models

Berkshire Hathaway and Rocket are fundamentally different companies. Berkshire Hathaway is a holding company with primary business lines in insurance, manufacturing, utilities, and other activities. It also holds a huge investment portfolio that will be sensitive to the fluctuations of the equity markets. This means Berkshire is basically one big diversified equity portfolio run by one of the best investors ever in Warren Buffett. While the insurance arm will be more affected by natural disasters than the economy for the most part, Berkshire will move in line with GDP and the stock market. It is a steady performer.

Rocket is a pure-play mortgage originator with a technological edge that makes it much more profitable than its peers even as it originates more mortgages than any of them. That said, Rocket's business is highly sensitive to interest rates. When rates are low and refinance opportunities abound, the company will feast -- that's the scenario today, and it could be for a while. According to mortgage data company Black Knight Financial Services, roughly 19.3 million mortgages in the U.S. are "high-quality" refinance candidates. This amounts to trillions of dollars worth of loans -- enough to last years. When rates rise and the refinance opportunities disappear, Rocket will be forced to take share in order to grow. Taking share means cutting prices in a lower-volume environment.

Believe it or not, the fast grower is cheaper

Berkshire Hathaway is trading at 23 times expected 2020 earnings per share (EPS) as of Tuesday's close. This is more or less typical for the stock. If Berkshire has a bad year in the stock market, earnings will fall and the price-to-earnings ratio (P/E) will rise. But the underlying businesses like insurance or rail transport are relatively steady performers. In 2019, the vast majority of Berkshire's earnings came from investment income. Of the non-investment income, insurance accounted for 24% of earnings, and rail (Burlington-Northern) accounted for 23% of earnings. 

Rocket trades at less than 7 times expected 2020 EPS. This is a surprisingly low P/E for a fast-growing stock, but it's typical for highly cyclical companies. These companies often trade at high P/E multiples during the bad part of the cycle, and then trade at an extremely low P/E at the height of the cycle. To give you an idea of how dramatic this effect can be, consider that competitor PennyMac Financial Services trades at less than 4 times this year's expected EPS.

Different growth prospects

Another issue to consider is the relative ceiling of each company. Berkshire Hathaway has a market cap over a half-trillion dollars. Once companies get that big, the number of potential investments that can move the needle on growth are small. Making Berkshire a trillion-dollar company will be a herculean effort.

Rocket, on the other hand, has a market cap of only $46 billion. How can it grow? It can take share in the mortgage market (which is still highly fragmented). It can branch out into other consumer financial products. Or it could consolidate smaller financial sector players. Increasing Rocket's market cap from $46 billion to $92 billion is much more realistic than getting Berkshire from $523 billion to $1.05 trillion. 

In many ways, Berkshire is much more of a conservative "sleep at night" stock. It is a diversified portfolio. Rocket will probably experience some volatility in its earnings stream. That said, it's also a fast-growing, albeit highly cyclical, company. It is the dominant player in its space, trading at 7 times earnings, which is why it is one of my CAPS picks. I think the mortgage market is set for a good run, and Rocket is the most profitable mortgage operation out there, by far.