3 Key Reasons Why Rocket Companies Stock Will Rally Soon

Key Points

• Rocket Companies stock could be the breakout trade in the real estate and mortgage industry, and there are three reasons to make this a potential trend.
• With fundamentals backing the stock and institutional and insider buying, it looks to be sentimentally above its competitor, SoFi Technologies.
• Wall Street analysts expect triple-digit EPS growth and have recently boosted their valuations by 25%.

Markets will always have a reason to keep the market going, and always come up with reasons as to why a stock might be falling, whether these reasons are valid or not. Today, investors need to cut out the noise as volatility starts to hit the S&P 500 and other baskets of stocks, especially the ones that carry the most potential tail risk for a new rally based on fundamental reasons as well as technical.

While most believe that the real estate sector has a bigger chance of delivering a bearish rest of the year, based on unaffordability and high mortgage rates, there are a few indicators that show some stocks in the sector might be worth considering for a potential swing in the coming months. Namely, one stock is catering to new homebuyers sitting on the sidelines waiting for more flexible and better financing rates for a purchase.

Investors can find such an opportunity in Rocket Companies Inc. NYSE: RKT. It doesn’t come without risks, of course, but there are three main reasons that stand out for this stock to be considered a potential winner for the next few quarters. But as some wonder whether they can outperform SoFi Technologies Inc. NASDAQ: SOFI, the answer becomes clear in this first point.

Market Sentiment Favors Rocket Companies Stock Over SoFi

Price action can be one of the first gauges investors consider when comparing two closely related companies. Rocket stock now trades at 87% of its 52-week high, showcasing bullish price action as one of the potential reasons to watch this stock.

Its competitor, SoFi, trades at a much lower 67% of its 52-week high. This shows investors where the industry's bullish and bearish sentiment is landing, giving Rocket the first point in favor. Here's another metric investors can consider.

Market capitalization: The bigger company is typically there because investors are forward-looking and give the business the valuation they think it deserves, considering its current prospects.

Rocket Companies is a $39 billion name, while SoFi has stood well below its competitor, which has a $8.5 billion market capitalization. Considering these trends, investors can start to see where the balance begins to tilt, favoring the bulls and not the bears. Here's another reason to watch Rocket stock.

Rocket Companies Stock's Financials Pave the Way for a Potential Rally

Digging deeper into Rocket Companies’ financials could reveal another driver placing this stock on a potentially higher path. More specifically, investors can look at the balance sheet and notice one of the biggest items the company holds in its asset base.

 Up to $9.5 billion worth of mortgages held for sale can be found in the company’s balance sheet, and here’s why that’s bullish for the future. Like bonds and other fixed-income products, mortgages see their prices move opposite to yields. Now that the Federal Reserve (the Fed) is looking to cut rates this September 2024, mortgage values might go up.

Assuming the Fed does cut rates and that mortgage rates follow (as fundamentally they should), Rocket Companies could experience a significant boost in its balance sheet and, therefore, its book value. This increase should be directly reflected in the stock price as markets realize how valuable this company can become during this cut cycle.

According to the company’s investor presentation, Rocket holds up to 12% of the mortgage market today. The number of mortgages generated as rates decrease could double the stock’s value.

Speaking of mortgages, the mortgage market index is now at 1996 lows, meaning there isn’t much more room for it to move lower. With the risk-to-reward scale favoring reward in this case, a rebound in mortgage demand could be imminent, and that’s another point for Rocket’s reach and scale over SoFi’s.

What Wall Street Analysts Are Saying About Rocket Companies Stock

Understanding that the new valuations for these mortgages might be reflected in the company’s bottom-line earnings, Wall Street analysts have now assigned forecasts that reflect this potential trend more.

Up to 127.3% earnings per share (EPS) growth is now expected from Rocket Companies in the next 12 months, mainly because of the reasons that have already been discussed. Tagging along this new bullish stance from Wall Street, analysts at the Royal Bank of Canada reflect their view through new price targets.

Boosting Rocket Companies stock from $16 a share to $20 a share not only expects roughly 8% upside from today’s prices, but it also represents a 25% boost in valuation from previous targets. This means that other analysts could follow this trend and boost their own valuations.

Analysts weren’t the only ones turning bullish on this stock, however, as inside company directors have also been on a buying spree since June 2024. Up to $180 million in institutional capital has also made its way into Rocket Companies over the past 12 months as another vote of confidence.

Finally, bearish traders even started to withdraw from the stock. Rocket Companies stock’s short interest declined by up to 6.9% in the past month alone, showing bearish capitulation as the stock faces so much potential upside.