Ahead of the long weekend, and the unofficial end of summer for the trading community, it was a mostly quiet and mixed week as the S&P 500 was unchanged, the Dow gained 0.9%, and the Nasdaq fell 0.7%. Though that quickly changed Tuesday when the market got hit hard.
The Stock – Rocket (RKT)
Rocket is a Detroit-based fintech that offers a suite of services ranging from mortgage, real estate and personal financial transactions. The company’s flagship business, Rocket Mortgage, has provided over $1.6 trillion in home loans since 1985 (including through its recently introduced Rocket Mortgage App), and its expansion into complementary industries like real estate services and personal lending seeks to “reinvent and enhance” the client experience by leveraging the AI-driven Rocket Logic platform by expediting loan processing, handling client interactions and streamlining various tasks traditionally performed by human agents.
In recent months, U.S. lenders have become decidedly more “credit cautious,” which is exacerbating a home affordability crisis; U.S. housing affordability remains at historic lows thanks to persistently high mortgage rates and rising home prices (this spring, home purchase applications fell to their lowest levels in over three decades). However, this stock has turned strong as green shoots are starting to appear that could change this dynamic going forward: Mortgage rates have been on the skids, down not just 1.4 percentage points from their 2023 highs but falling nearly half a point just in the past month (thanks in part to the early-August market and currency panic). When you combine that with what is surely massive pent-up demand (especially among first-time buyers and first-time move-up buyers) and a Fed that’s almost surely starting an easing campaign this month, Wall Street is thinking a turn in Rocket’s business is coming.
Indeed, the company says it’s already reaping the benefits of these green shoots, with the addition of 67,000 new clients and around $21 billion in unpaid principal balance among new mortgage servicing rights (MSR) portfolios it recently acquired. Rocket said the loans in these newly acquired MSRs have a higher average interest rate compared to previous portfolios, and opening up a range of products and services for these new clients.
Wall Street sees earnings catapulting into next year, and given how profitable the firm has been in the past ($4.11 per share in 2020, $2.26 in 2021) even these estimates could prove conservative.
Technical Analysis
We’re seeing what we think is a solid entry opportunity—there are never any guarantees, but the first pullback after a breakout and persistent advance is usually a higher-odds entry. Of course, RKT is likely to get pushed and pulled on the rate outlook (last week’s pickup in 10-year yields likely had something to do with the stock’s retreat, while today’s dip helped), but with the trend of rates down, that should be a positive over time. Stop – 16.4
The Covered Call Trade
Buy Rocket (RKT) Stock at 20, Sell to Open October 20 Strike Calls (exp. 10/18) for $1.20, or a Net Price of 18.8 or less
Static Return: $120 per covered call (6.38%)
Breakeven: 18.8
Covered Call Return (if assigned): $120 per covered call (6.38%)
Please note, the stock and options prices will be moving throughout the day, so these prices are simply an approximation of prices that you should be able to achieve.
However, the important component of this equation is that the stock price paid, minus the premium received via the call sale, equals the Net Price, or 18.8 or less. (In this case 20 minus 1.20 = 18.8. Or another example is you could pay 20.20 for the stock and sell the call for 1.40, which also equals 18.8)
For every 100 shares of stock you buy, you can sell 1 call. For every 200 shares of stock you buy, you can sell 2 calls. And so on …
Open Positions
| Stock Name and Symbol | Price Bought | Current Stock Price | Stop | Option - Price of Call Sold | Current Option Price |
| Sprouts Farmers Market (SFM) | 96 | 97.5 | 80 | September 95 -- $5.20 | $4.00 |
| Coupang (CPNG) | 22.6 | 22.3 | 20 | September 23 -- $0.80 | $0.45 |
| Sweetgreen (SG) | 34.9 | 30.5 | 28.5 | September 34 -- $2.90 | $0.60 |
The next Cabot Profit Booster issue will be published on September 10, 2024.
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