After soaring last week, the mortgage giant’s stock then plummeted back to earth.
Rocket Companies (NYSE:RKT) plunged 33% on Wednesday after analysts warned that the stock had come too far, too fast.
So what’s happening?
Rocket’s share price surged more than 70% on Tuesday in what appeared to be another Reddit-triggered short squeeze. But last night, RBC Capital analyst Daniel Perlin lowered his rating on Rocket’s stock from “Outperform” to “Sector Perform” and reiterated his price forecast of $30. That was 28% below the price at which Rocket’s shares closed yesterday. Perlin argued that the risk-reward ratio for investors was “now more balanced, if not shifted downwards” after the stock’s rapid rise.
Analysts at JPMorgan went even further. “Given the sharp rise in the share price, we believe fundamental investors should take profits,” JPMorgan strategist Richard Shane said on Wednesday morning.
Many traders apparently took these analyst comments as an opportunity to sell their shares.
Many individual investors are participating in coordinated buying campaigns on Reddit and other social media platforms. This is a dangerous game – one that often ends in disaster.
This buying frenzy by the masses can certainly help drive up the price of a stock sharply for a while, as we saw with GameStop and now Rocket Companies. But many of these traders will hype up a stock to drive up its price – and then hand it over to unsuspecting investors when they eventually move on to their next target.
The worst part? Shareholders who buy later in these manipulated price rallies and fail to sell in time can suffer devastating losses.