/Shares of Rocket Companies, a large short target of hedge funds, jump more than 50%

Shares of Rocket Companies, a large short target of hedge funds, jump more than 50%

Shares of Rocket Companies rallied as much as 70% Tuesday in a surprising move on no apparent new news. 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.

Nearly 40% of its available shares are sold short and it is near the top of the list of U.S. companies in terms of size of short bet 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.

Tuesday’s jump put Rocket on track for its best day ever since its IPO in August 2020. The stock last traded up 51% and trading was halted briefly due to volatility.

A number of popular posts on WallStreetBet chatroom featured Rocket on Tuesday. One says “I like RKT. $ 1.7M all-in, let’s gooo YOLO,” and it quickly drew more than 1,700 comments.

The jump in Rocket Companies shares Tuesday did not catch trader Jon Najarian by surprise. Najarian, a panelist on CNBC’s “Halftime Report” known for spotting unusual activity in the options market, said on Tuesday’s show that his interest in Rocket Companies was piqued a day earlier. 

“Our beta-tested social media stuff right now picked up on yesterday some really just hugely bullish comments over on the Reddit board WallStreetBets again. These men and women are back and they’re into this one in a big way,” said Najarian, co-founder of Market Rebellion who has call positions in Rocket Companies and put positions in GameStop. 

Najarian cited a jump in Rocket options trading volume following increased mentions on Reddit.

Still, it remains to be seen whether there is the kind of social groundswell that could keep momentum going in Rocket shares. Meme-driven chatter on Rocket was not nearly as intense as seen on GameStop, according to AI firm Accrete.

“It’s 38% short … When people see that, they think you can bust the sellers,” CNBC’s Jim Cramer said on “Squawk on the Street,” while adding he actually likes Rocket Companies’ management and business fundamentals. 

“I have been a huge fan of [CEO] Jay Farner and [Chairman] Dan Gilbert .. and frankly don’t understand why the stock did not react to what was a very good where they basically laid out a story that just said, ‘We can show how when rates go up, it has not hurt our business. When rates go down, it’s not hurt our business.'”

The surge in Rocket could be a sign that the retail trading mania seen in GameStop earlier this year is still a factor. A month ago, an army of retail investors on Reddit managed to push the brick-and-mortar video game retailer up 1,500% in two weeks, inflicting huge pain for short selling hedge funds. The broader market also experienced some spill-over impact from the frenzy as many big investors took down risk across the board.

When a stock with high short interest jumps sharply higher, it could force short sellers to cover their bearish positions in order to limit their losses. The short covering tends to fuel the stock’s rally further.

Rocket reported stronger-than-expected fourth-quarter earnings on Thursday, which impressed some Wall Street analysts. Wells Fargo raised its price target slightly and moved up its earnings estimate for Rocket following its big beat.

“We were impressed with Q4 earnings, particularly the resilience of their direct to consumer retail GOS margins,” Donald Fandetti, Wells analyst, said in a note on Monday. “RKT seems to be well positioned to take market share if the environment gets more dislocated from higher rates.”

— CNBC’s Kevin Stankiewicz contributed reporting.

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