Over the past six months, Rocket Companies’s stock price fell to $13. Shareholders have lost 12.4% of their capital, which is disappointing considering the S&P 500 has climbed by 12.9%. This was partly driven by its softer quarterly results and might have investors contemplating their next move.
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Why Is Rocket Companies Not Exciting?
Even though the stock has become cheaper, we’re cautious about Rocket Companies. Here are three reasons we avoid RKT, plus one stock we’d rather own.
1. Revenue Spiraling Downwards
From lending activities to service fees, most banks build their revenue model around two income sources. Interest rate spreads between loans and deposits create the first stream, with the second coming from charges on everything from basic bank accounts to complex investment banking transactions.
Rocket Companies’s demand was weak over the last five years as its revenue fell at a 9.5% annual rate. This wasn’t a great result and is a sign of lacking business quality.
2. EPS Trending Down
We track the long-term change in earnings per share (EPS) because it highlights whether a company’s growth is profitable.
Sadly for Rocket Companies, its EPS declined by 33.3% annually over the last five years, more than its revenue. This tells us the company struggled because its fixed cost base made it difficult to adjust to shrinking demand.
3. Previous Growth Initiatives Haven’t Impressed
Return on equity (ROE) measures how effectively banks generate profit from each dollar of shareholder equity - a critical funding source. High-ROE institutions typically compound shareholder wealth faster over time through retained earnings, share repurchases, and dividend payments.
Over the last five years, Rocket Companies has averaged an ROE of 6.9%, uninspiring for a company operating in a sector where the average shakes out around 10%.
Final Judgment
Rocket Companies isn’t a terrible business, but it doesn’t pass our bar. Following the recent decline, the stock trades at 1.6× forward P/B (or $13 per share). This multiple tells us a lot of good news is priced in - you can find more timely opportunities elsewhere. We’d suggest looking at one of our top software and edge computing picks.
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