By Senad Karaahmetovic
Shares of Rocket Companies (NYSE:RKT) are up over 5.5% after Wells Fargo analyst Donald Fandetti upgraded the company’s rating to 'Overweight' from 'Equal Weight'.
While the analyst acknowledges an “extremely challenging” residential mortgage market, he believes Rocket could benefit from the dislocation. Fandetti also believes the tail risk from interest rate expectations “seems to have less upside.”
“We've been on the sidelines with this stock through the sell-off, but have appreciated the quality of the franchise, technology and long-term market share potential… We believe RKT should trade at a multiple representative of a high-quality, premium, financial company. Our '23 estimate implies a 17% ROE, which screens high among financial companies and supports our target multiple. Thematically, we believe RKT is a nice recession hedge if the US economy were to slip into a more meaningful slowdown.”
Moreover, the analyst is more bullish on RKT given that shares are down over 40% YTD, more than double the S&P 500’s drop of around 20%.
“We now see a better risk/reward for the stock in a sector where negative sentiment may have peaked. And as capacity comes out of the origination market, we should see margins further stabilize and at some point increase modestly,” Fandetti concluded.
The analyst also hiked the price target on RKT to $10 from the prior $6.50.