Rocket Companies Gains Another 20% Suggesting Potential Short Squeeze

Rocket Companies Inc RKT gained another 23% on Monday morning, suggesting the company’s impressive earnings beat last week may have triggered a short squeeze in the stock.

What Happened: Last week, Rocket reported 162% revenue growth and 350% net income growth in the fourth quarter, exceeding analyst expectations. Rocket also announced a surprise special dividend of $1.11 and said it expects its record origination volume will carry over into at least the first quarter of 2021.

Rocket shares initially popped 9.8% last Friday following the impressive numbers, but share gains have accelerated over 35% so far this week. The big follow-up move suggests technical market conditions may be driving the gains more than company fundamentals.

Related Link: Rocket Companies Continues Higher Amid Mortgage Market Resiliency

What Is A Short Squeeze? A short squeeze occurs when a group of short sellers close (or "cover") their short positions in a heavily-shorted stock all at once by buying back shares. The demand for shares from short covering drives prices higher, often leading to more short covering.

According to Yahoo, Rocket is one of the most aggressively shorted stocks in the market. Rocket currently has about 43 million shares short, or about 37.4% of its float.

Perhaps many of these short sellers were betting Rocket’s 2021 guidance would be weak given mortgage rates jumped to their highest weekly rate since August. Rocket and other mortgage stocks are also facing extremely difficult 2021 comps after historically low interest rates sparked a mortgage market boom in 2020.

CEO's Warning: Back on Jan. 29, Rocket Companies CEO Jay Farner said this is "not a stock you want to be short in."

"You might want to rethink your position if that's how you are playing it," Farner said. "We've got a great track record and a lot of exciting things we are working on."

Rocket shares are currently priced at a steep premium to its mortgage stock peers, but analysts say the company’s combination of high-margin direct-to-consumer sales and high-growth sales through its partner channel justify the premium. Even after this week’s big gains, Rocket’s stock trades at just 13.5 times consensus 2021 earnings estimates.

Benzinga's Take: The extremely low forward earnings multiples among Rocket and other mortgage stocks suggests investors are pricing in a slowdown in business in 2021. The bar appears to be set relatively low based on those valuations, meaning a relatively mild drop in business this year could be enough to trigger a relief rally.