What’s Going On With Rocket Stock

For much of the six months since Rocket Companies’ (NYSE: RKT) IPO, their shares have traded sideways. But while the shares gave the impression of a mortgage lending company that was finding its feet on the public stage, the growing percentage of the company’s stock that was being held short told a different story.

Investors and non-investors alike were glued to the headlines last month when GameStop (NYSE: GME) shares popped more than 2,000% in an epic short squeeze. It seems a combination of cheap online trading and ever-growing crowdsourced investing forums such as Reddit’s WallStreetBets have finally combined to create a real headache for billion-dollar funds.

Anybody can access a public company's short float percentage and this has become the bullseye for many first-time traders looking to make a quick buck. The thinking is that if they all crowd in together, the fresh demand and uptick in shares could put the existing shorts under pressure. If they’re squeezed hard enough, they’ll have to exit, or cover, their short position by buying shares, adding to the demand, and sending the price higher in a vicious circle.

Since GameStop’s rise and fall, the hunt has been on to find other heavily shorted stocks that could be squeezed. Enter Rocket.

Solid Earnings

Rocket is an online mortgage provider based out of Michigan. They’ve been around in one form or another since 1985 but in their current version have only recently gone public as mentioned above. Their Q4 earnings last week were the first that gave investors a look at a full quarter’s operations and they didn’t disappoint. Revenue was up 161% on the year as it smashed expectations, as did bottom line EPS. Basically, every metric knocked it out of the park, with the likes of closed loan volume doubling compared to the same quarter last year.

With those kinds of numbers, a juicy 40% short float number was always going to attract attention and here we are. Since the report last week shares have jumped close to 90% to all-time highs on record volume. Trading was halted several times in Tuesday’s session as volatility soared and the bears who were short got nervous. Shares were down slightly in Wednesday’s pre-market session but this story is really only getting started. If it can command half the air time that GameStop managed to have last month, we could be seeing triple digits prints in the share price within a few days.

What To Make Of It

The likes of Wells Fargo have urged caution. In a note to clients, analyst Donald Fandetti said “we believe the trading reflects retail/Reddit activity like we’ve seen in other stocks recently, we noted our incrementally more positive view, but not good enough to support this move which is the third trading day after earnings. We expect the shares to normalize and again trade on fundamentals, however the timing is uncertain.”

CNBC’s Jim Cramer has been highlighting this week’s jump and has said he’s a "huge fan” of Rocket's CEO and that he likes the company's fundamentals. For those of us on the sidelines and listening to all this chatter, it can be hard to stay rational, particularly when a teenager is posting six-figure profits from his parent’s basements.

It’s important to remember that fads, or meme stocks as they might be called these days, come and go, and there’ll always be a stock that pops 100% or more every day. But we need only take a look at GameStop’s chart to understand the risk and you never want to be the last person holding the bag.

Still, that doesn’t mean you can’t have a small bit of fun with some play money and tight risk management, right?