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Why Rocket Companies Stock Sank 10.9% in July

By Dave Kovaleski – Aug 4, 2021 at 2:09PM

Key Points

  • Rocket is the largest home mortgage lender in the country.
  • A class-action suit may have hurt performance in July.
  • Investors will be looking forward to second-quarter earnings later this month.

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The home mortgage lender has not been able to gain traction in a hot housing market.

What happened

Rocket Companies (RKT 3.40%) had another rough month in July, dropping 10.9%, according to S&P Global Market Intelligence. The leading home mortgage lender in the U.S. was well off the benchmark, the S&P 500, which gained 2.3% in July. The mortgage company's stock price is down about 9% year to date as of Aug. 4, trading at about $17 per share.

So what

Rocket is the largest home mortgage lender in the U.S. by loan originations. It went public last August at $18 per share and is down slightly from that one year later. But it's been a bumpy ride as the stock spiked to over $40 per share in March only to come crashing back to earth in the ensuing months.

A person at their desk, rubbing their eyes, looking concerned.

Image source: Getty Images.

The stock's performance is a little perplexing, considering the housing market is hot with rising prices and home sales, and interest rates remain low.

Rocket had a solid first quarter, with revenue up 236% to $4.6 billion, while its net income rose 170% to $1.8 billion. However, the gain on sale metric -- profit made on each loan -- dropped from 4.4% to 3.2%. 

Now what

There are a few issues at play here that may be hurting Rocket. One is increased competition, particularly from United Wholesale Mortgage, the largest wholesale mortgage lender and fourth-largest overall. UWM has vowed to become the largest home mortgage lender in three years and in March it informed mortgage brokers that if they did business with Rocket, they could not do business with United Wholesale Mortgage. This may have scared off investors to both companies, as United Wholesale Mortgage's stock is also down for the year.

Also, in late June, Rocket got hit with a class-action suit from shareholders, alleging the company concealed information about competition that impacted its gain on sale numbers, according to a Reuters report. Rocket denies the allegation, but the news may have hurt the stock's performance.

Rocket is set to report second-quarter earnings this month. It will be interesting to see how it performed and how the market reacts.

Dave Kovaleski has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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