What happened
Shares of Rocket Companies (RKT 2.64%), the largest mortgage originator in the U.S., bounced more than 10% higher at one point in the mid-morning after an analyst firm upgraded the stock.
So what
Rocket has been on a turbulent ride as of late. Last week, traders including those who follow the popular Reddit group WallStreetBets noticed a lot of short interest in the company, and pumped up the stock to nearly $42 per share.
Since then, shares have come back down to around $26.50, with a lot of volatility. Still, the stock trades much higher from late February, when it sometimes traded below $20 per share.
Image source: Getty Images.
Today, the research firm Zelman & Associates upgraded Rocket to a buy rating and added it to its Top Ideas Basket. In their report, Zelman analysts wrote that they believe management will be able to "navigate the more tenuous environment going forward."
Now what
The mortgage business is considered to be very sensitive to interest rates. The Federal Reserve's decision last March to drop its benchmark federal funds rate from 2% to zero sent mortgage rates plunging, triggering a huge refinancing wave that Rocket rode to record originations and profits in 2020.
But this year, the yield on the 10-year U.S. Treasury note, which mortgage rates are directly linked to, has surged, leading to higher mortgage rates and fewer mortgage applications.
Investors are trying to determine whether Rocket can thrive in a higher-rate environment when the mortgage business is not as strong. The company has grown other revenue streams such as auto lending and also looks to be picking up market share in the mortgage market, which will hopefully allow it to originate more purchase mortgages.
Given the recent bump from WallStreetBets, its stock could remain volatile in the near term. But it seems to be trading at a fair level in the low to mid $20s, and I think it's definitely a good long-term opportunity if you can buy it in the low $20s.
