UPDATE: COOP, RKT, & Mortgage Spreads

An update to the pair of mortgage finance stocks and the outlook on earnings & valuations

An Update to COOP & RKT:

The information provided is NOT financial advice. I am not a financial adviser, accountant or the like. This information is purely from my own due diligence and an expression of my thoughts, my opinions based on my personal experiences, and the way I transact. This information is provided for general informational purposes only and should not be considered as personal advice. Your money, your outlay, your risk. This presentation does not provide investing advice in any way shape or form. You will be solely responsible for any decisions you make. If you need to seek any advice, speak to your advisers, accountants or other professionals who you may be relying on for your wealth creation journey. Please do your own due diligence.

Since publishing the piece on RKT on 8/21, its down 10%. Score one for the good guys who avoided or shorted. Grade 9/10.

In the write up I said I didn’t think you could buy Rocket unless you were sure rates would continue lower, or spreads on mortgages would tighten. And in the short term, neither of those things happened. In the longer term, it was trading around a $38 billion market cap off of $5 billion of revenues, which at 7+ turns is not insane if growth is promised, but in this case, growth is and was heavily dependent on rates. But the main thesis was, RKT while an amazing Company gets ahead of itself when rates move. And that despite treasury rates moving a lot, mortgage spreads didn’t move. And so, valuations were or are too high.

Check out the full premium write up here:

And what about Mr. Cooper? Since publishing my report on 9/19 COOP is up about 4.4%. A mortgage finance Company hanging in despite higher rates, yes. Grade 9/10.

In the write up, I said yes you (and I since I did) can buy COOP because I was confident that it would earn well in the environment we’re in. One where everyone hopes refis will pick up, but the math wasn’t mathing on it actually happening right now. And also it was worth noting that ‘25 EPS estimates were not in fact crazy at all in the $12 to $14 dollar range even though consensus was on the lower end. And also, important to note, a servicing heavy mortgage finance company like COOP will be better equipped to handle higher rates all things equal. I did add in the low 90s after writing as well.

Check out the full premium write up here:

The Pair

And so, the pair trade of the two looks something like this, up about 15% in short order. Not bad, grade 9/10.

Sometimes you get lucky on timing. This feels a bit like that even though the longer-term fundamental thesis is intact. And very intact in my opinion.

Updates to RKT & COOP