Rate Cut Winner

So my Outsider Club partner Christian DeHamer (affectionately known as Hammer) asked me how my beach week was – from Marseilles. I don’t know if he’s trying to rub it in or what. I took a week off at a beach that’s not even 10 miles south of my house – and he’ll be in Naples for a couple days and then Rome.

And I thought we were friends…

You work with a guy for 30 years, you’d think you get to know somebody…

So I thought I’d try and exact a little revenge on him, and make fun of some of the stocks he’s talked up here at Outsider Club.

July 23, he wrote about a food delivery robot company Serve Robotics (NASDAQ: SERV). The stock had already run from $2 to $8 on news of a deal with U*ber: I love this type of break-out stock. The chart is flat and no one cares about it, and then it breaks out on high volume due to a news event.

6 days later the stock opened at $20, hit an intra-day high at $24 and pulled back down to $10 as of yesterday.

SERV was up 20% yesterday, to ~$12.50. Today, it’s AST SpaceMobile (NASDAQ: ASTS). Hammer wrote it up on May 13 at $8. The stock is up +40%(!) today, to $30 a share…

Sigh.

All his India stock picks from March are higher, Time Technoplast (TIMETECHNO.BO) the winner, up 51%…

The stocks he recommended for interest rate cuts on June 12 – Rocket Mortgage (NYSE: RKT) and Zillow (NASDAQ: Z) are both higher, RKT by nearly 30%…

When you’re good, you’re good.

Rocket and Rate Cuts

You’re probably aware that the latest inflation data has come in fairly benign. It is now a foregone conclusion that the Fed will cut rates at the September meeting (which comes September 17-18). The only real question is how large the cut will be – quarter point or half point.

This is already good news for Rocket, hence the solid rally since inflation started really improving in May.

Analysts are already penciling in a pretty solid rebound for Rocket in 2025. They estimate that earnings per share will jump from $0.28 this year to $0.58 next year. Yes, that’s more than a double…

Analysts also say that revenue will grow from $5.3 billion this year to just over $6 billion next year.

If you do the math, you’ll find that at $19 a share, Rocket trades with a forward Price-to-Earnings (P/E) ratio of 32. That’s…not exactly cheap.

But there’s reason to be optimistic. And it has to do with just how badly the surge in mortgage rates affected Rocket’s revenue.

Consider the following:

Rocket revenue for the quarter ending March 31, 2024 was $1.384B, a 107.74% increase year-over-year.
Rocket revenue for the twelve months ending March 31, 2024 was $4.517B, a 17.81% increase year-over-year.
Rocket annual revenue for 2023 was $3.799B, a 34.93% decline from 2022.
Rocket annual revenue for 2022 was $5.838B, a 54.79% decline from 2021.
Rocket annual revenue for 2021 was $12.914B, a 17.48% decline from 2020.

Yes, from just under $13 billion in revenue for 2020, Rocket revenue fell all the way down to $3.79 billion in 2022. That’s brutal.

Rocket is already clawing its way back. If it does manage to hit $6 billion in fiscal 2025 revenue, that would be impressive – a 50% gain for revenue in 2 years from the 2022 low.

So I’m looking at that $12.91 billion in revenue from 2021. And as that table says, 2021 revenue was actually down 17.48% from 2020! I suppose Rocket really benefitted from all the relocating that happened in 2020 during the pandemic.

Don’t be surprised if there is a similar surge for homebuying when mortgage rates come back to something resembling affordable. Rocket could be a big-time winner.

Cheers,

Briton Ryle
Chief Investment Strategist
Outsider Club

X/Twitter: https://twitter.com/BritonRyle

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