What happened
For the week, shares of Rocket Companies (RKT -4.34%) traded roughly 15% higher as of market close Thursday after an analyst upgraded the stock and assigned it a bullish rating.
So what
Wells Fargo analyst Donald Fandetti upgraded Rocket from an equal-weight rating to overweight and lifted his earnings per share estimate from $0.65 to $0.75 in 2023.
Rocket has been sold off intensely as rising mortgage rates have sent mortgage activity plummeting and crushed Rocket's gain-on-sale margins. The stock is down more than 40% this year even after the rally this week. But Fandetti thinks the selling could be nearing an end.
"We now see a better risk/reward for the stock in a sector where negative sentiment may have peaked," Fandetti wrote in his research note. "And as capacity comes out of the origination market, we should see margins further stabilize and at some point increase modestly."
Fandetti also noted that he thinks Rocket could take a dominant share of the mortgage market, as "many mortgage companies continue to struggle and lose market share, as well as be forced to sell attractive mortgage servicing rights."
The analyst expects Rocket's market share to fall from 8.8% in 2021 to 6.6% in 2022 and then tick up to 6.7% in 2023.
Now what
The mortgage market is very cyclical, as evidenced by the last few years, but Rocket needs to take more market share if it's going to be a true winner. If there's anyone that can, it's certainly Rocket, which is the largest mortgage originator in the U.S., but the company only increased its market share to roughly 9% when mortgage activity was booming during the earlier part of the pandemic.
Hopefully, the company is taking share in the purchase market right now, which will give it more servicing rights and set up refinancing activities when mortgage rates cool off.
The stock might be nearing a bottom, but I'm choosing to focus on other opportunities right now until there is more evidence that Rocket can grow market share much more significantly in a very fragmented market.