Rocket Companies Continues Higher Amid Mortgage Market Resiliency

Rocket Companies Inc RKT shares traded higher by 10% on Monday morning after The Wall Street Journal published a story suggesting Rocket’s mortgage business is still booming.

What Happened? Rocket Companies' shares are now up about 20% since the company reported an earnings beat last week and announced a surprise special dividend of $1.11 per share.

On Monday, WSJ's story praised Rocket for the way it has successfully navigated a challenging environment of rising mortgage rates up to this point.

Why It’s Important: The mortgage market experienced a boom in 2020 thanks to historically low interest rates. The favorable environment allowed Rocket and other originators to generate record sales and growth numbers throughout the year.

Interest rates have started to rise significantly in recent months, leading some investors to worry about the combination of rising rates and extremely difficult 2021 comps for Rocket.

See Also: Rocket Companies 'Firing On All Cylinders,' BofA Says After Q4 Print

Last week, mortgage rates climbed to their highest weekly rate since August, according to Freddie Mac. Rocket shares jumped, however, when the company said it expects its record origination volume will carry over into at least the first quarter of 2021.

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 gaining another 10% since Friday, Rocket’s stock trades at just 11 times consensus 2021 earnings estimates.

Benzinga’s Take: The extremely low forward earnings multiple among Rocket and other mortgage stocks suggests investors are pricing in a steep 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.

Rocket's stock trades around $23.85 at publication time.