| Detroit Free Press
Stock in Detroit-based Rocket Companies mirrored the look of a Reddit-induced GameStop rally, as shares climbed a shocking 72% in trading shortly after 2 p.m. Tuesday.Are we looking at the next GameStop wild ride here with more outlandish gains ahead? Rocket was trading at $38.05 a share before 3 p.m. Tuesday, up $13.75 a share or 56.58%. Will a stock in a mortgage company — much like one in a beaten down video game retailer — now soar to the stratosphere simply because Robinhood speculators and others are aiming their arrows at the stocks that the so-called evil hedge fund professionals expect to see go fall in price? Rocket was on pace for a record gain Tuesday as the trading-by-Twitter games continued. ‘Looking down their nose at you’: GameStop frenzy showed a fresh contempt for hedge funds. Why do Americans hate them?’I am not a cat’: Chaotic GameStop hearing provides tense exchanges, humor as lawmakers grill key players in sagaWhere it all ends up, of course, is anyone’s guess.”There seems to be a desire to get into the next GameStop before it happens,” said Boone Bowles, assistant professor of finance at the Mays Business School at Texas A&M University.”Folks thinking that the GameStop saga and the sharp rise in interest rates last month would combine to dampen speculative trading in the market may need to reconsider,” Bowles said. Rocket Companies — which launched what many viewed as a successful initial public offering back in the summer — has drawn the interest of professional investors who are betting that the stock will tumble in value.Rocket stock — ticker symbol RKT — began trading on the New York Stock Exchange on Aug. 6 when the stock closed at $21.51 a share — up $3.51 a share, or 19.5%, from the IPO price of $18. Back on Sept. 2, Rocket closed at a high of $31.31 a share. But the stock had since pulled back. The stock had closed as low as $19.54 on Jan. 19. Rocket closed at $24.30 on Monday, up $2.45 a share or up 11.2%. But it skyrocketed to trade above $42 a share on Tuesday.Rocket reported Thursday that it did a record amount of mortgage business in 2020 during what was likely the most profitable year ever for the Detroit-based mortgage lender founded by billionaire and Cleveland Cavaliers owner Dan Gilbert.Rocket reported annual net income, or profit, of $9.4 billion from just under $1 billion the year before.Tuesday’s jump put Rocket on track for its best day ever since its IPO in August 2020.Playing the Reddit game means looking for fast cash and stretches where a stock can double or triple in value in days for no sensible reason other than a flush of market activity. Rocket stock has been building a buzz on Twitter and Reddit’s WallStreetBets.Manic market gains in some stocks — including GameStop, BlackBerry, AMC and Bed Bath & Beyond — occurred earlier this year, showing how the power of social media can inflame investors. CNBC reported Tuesday morning before 11 a.m. that Rocket was up more than 40% “in a surprising move on no apparent new news.”CNBC said Tuesday: “The online mortgage provider currently has large short bets placed against it by hedge funds and appears to have garnered some bullish interest from day traders on Reddit’s infamous WallStreetBets.” CNBC noted that Rocket is near the top of the list of U.S. companies in terms of size of short bets by hedge funds, according to FactSet.”That makes it a classic target by meme-obsessed investors, who have been storming together this year into shares and call options of heavily shorted companies in order to squeeze out short sellers. It was unclear of the size of the retail interest in Rocket at this time,” CNBC said.Short sellers, including hedge funds, are betting that a battered stock will go down even further and they’re hoping to make money as the stock falls in value. I wrote a column back in late January indicating Rocket, the parent of Quicken Loans and Rocket Mortgage, had a 40% short interest exposure then, according to S&P Capital IQ, a data division of S&P Global. It meant that 40% of the outstanding shares had been sold short by investors looking to make money when the price of the stock declines, a significant number according to experts.Rocket now has 41.3% short interest, according to S&P Capital IQ.Sam Stovall, chief investment strategist for U.S. equities at CFRA Research in New York, said Tuesday that it appears as if the Rocket shares have taken off as a result of a short squeeze, reminiscent of what happened to GameStop and AMC Entertainment. Speculators playing the short squeeze game attempt to drive up the stock price to ridiculous levels. The Reddit’s WallStreetBets users mounted a counterattack, for example, by buying stock in GameStop and others to drive up those stock prices to cause the hedge funds to take on huge losses. As the buying picks up by the social media traders, short sellers must enter into the market to buy the stock to cover their short positions and avoid losing even more money. Short sellers lose money when the stock price goes up. Investors betting against Rocket shares would be forced to unwind their short positions after a rally in the stock price. “This looks like GameStop all over again,” Paolo Pasquariello, professor of finance at the University of Michigan, said Tuesday.On the one hand, he noted, professionals view the Rocket stock as “overvalued” in price now.“Shorting involves selling stocks you do not own and so these pros have to borrow it, which costs money, from people who do own it,” Pasquariello said. “This would push the price down.”“On the other hand, you have the herd, ‘instigated’ by the anonymous rumor board on Reddit to buy this stock in absence of fundamental news.”Pasquariello said he could not find any significant news justifying the high price jump.But he views the Rocket play as somehow different than GameStop because Rocket is a company where reasonable people may legitimately disagree about on the outlook, given the currently hot real estate market and refinance mortgage business.“If the stock price is jumping up a lot, these short sellers will want to close their positions by buying the stock and accepting their loss, in fear of greater losses later,” he said.“However,” he noted, “the massive buying by Reddit people makes it difficult for them to buy the stocks, which ‘squeezes’ them and may lead to catastrophic losses.” Sam G. Huszczo, a chartered financial analyst in Southfield, said he too sees the Rocket takeoff as eerily similar to the GameStop situation.“Rocket is a highly shorted stock that is more ripe for the short squeeze strategy that the GameStop situation popularized,” he said.“And there has been some unusual options activity today with three times higher Call Option volume than normal.”“At this point,” Huszczo said, “it’s too early to tell if this was generated by retail traders like Reddit board users.”While Rocket had a decent earnings quarter, he said, that alone wouldn’t justify the stock’s bullish rise. And there is at least one amusing irony here in this story. “WallStreetsBets users love to use rocket ship emojis to signify stocks that they are targeting, which seems like a good fit for Rocket Mortgages,” Huszczo said.Contact Susan Tompor via email@example.com. Follow her on Twitter @tompor.