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Rocket Companies and Booking as Zacks Bull and Bear of the Day

For Immediate Release              Chicago, IL – December 28, 2020 – Zacks Equity Research highlights Rocket...

For Immediate Release             

Chicago, IL – December 28, 2020 – Zacks Equity Research highlights Rocket Companies RKT as the Bull of the Day and Booking Holdings BKNG as the Bear of the Day.

Here is a synopsis of both the stocks:

Bull of the Day:                                                 

There’s a theme to today’s Bull and Bear of the Day. The Bull is a company that’s priced at deep value level and the Bear is a company trading at nosebleed highs. The common thread between them is that their current prices seem to be a reflection of expectations that market conditions in both industries will change dramatically in 2021.

Personally, I’m betting on something closer to the status quo. That would make Rocket Companies an incredibly cheap way to capitalize on the low interest rate environment.

The term “disruptor” has been so overused lately that it has become an almost meaningless cliché in financial reporting. The concept certainly makes sense, but it’s far from new. Disruption has been the way that new companies have displaced old ones as long as the concept of investing has been around.

Improved technology and more efficient ways of delivering it have been improving our lives for as long as there have been opportunities to invest in the efforts of others. Efficient automobile manufacturers likeFord“disrupted” the buggy and blacksmith trades over a hundred years ago. Technology companies didn’t invent disruption, they’re simply part of the natural evolution of human innovation.

The lending industry – especially in residential mortgages – has been dependent on a great deal of human effort for a long time, but that’s changing fast. The traditional model is that a salesperson explains the available loan products to a customer, collects all the necessary information and documentation and turns the loan over to underwriters who determine that the credit of the borrower and the value of the collateral fit the risk standards of the lender.

Mortgage originators tend not to hold the loans on their own books, but rather pass them on to a federal agency or aggregate them into securitized bond products for institutional investors. The commission paid to that initial salesperson is often up to 1% of the value of the loan. The process is ripe for the savings that can be provided by technology. Computers can crunch numbers and make algorithmic decisions much faster than humans.

Mortgage products and the application process used to be more complicated than the average home buyer could readily understand. They needed that salesperson to explain it. Those times are gone. Consumers are now vastly better educated and more access to up-to-the-minute data about interest rates – as well as their own credit report. The broker is becoming less necessary and Rocket Companies is capitalizing on that trend.

Applying for a mortgage online has become extremely easy, the approval process is fast and efficient and the savings can be passed along to the consumer – or to the bottom line.

The parent company of Quicken Loans and Rocket Mortgage went public in August and saw a quick rally in share price, but has since retreated to just barely above the offering price of $18/share. Despite the fact that the housing market is extremely healthy and historically low interest rates mean that there are millions of customers who would benefit from refinancing, investors are giving RKT a 12-month forward P/E Ratio of just 6X.

That’s much lower than the S&P 500 at 28X and even well below traditional financial institutions like JP Morganand Citigroupwhich both trade at multiples in the mid-teens.

Earnings estimates have been rising lately, but investors still expect 2021 revenues that are much lower than 2020 – and that seems to be holding the share price down.

There are a lot of macro-economic factors that will affect the housing markets, interest rates and the mortgage markets. It’s impossible to know exactly what environment we’ll be in in a year, but especially in the bond markets, it’s usually a good bet to assume that the future will be similar to the present. With the US Federal Reserve committed to continue buying huge amounts of debt market assets for the foreseeable future, long -term interest rates are unlikely to rise quickly.

That’s good news for the housing markets and the mortgage business. The continued growth in the housing markets and opportunities to refinance existing properties to save money will keep mortgage customers showing up. Or, more accurately – clicking. In an environment in which people prefer online transactions to those that are conducted in-person, an efficient operation like Rocket ought to thrive.

With a rock-bottom valuation and a sustainable and scalable advantage over old-fashioned lenders, Rocket Companies is poised to exceed expectations for the foreseeable future.

Bear of the Day:

There’s a theme to today’s Bull and Bear of the Day. The Bull is a company that’s priced at deep value level and the Bear is a company trading at nosebleed highs. The common thread between them is that their current prices seem to be a reflection of expectations that market conditions in both industries will change dramatically in 2021.

In the case of the Bull, investors seem to be anticipating a change in economic conditions that will hurt the lending industry. In the case of today’s Bear – Booking Holdings – investors are looking forward to a huge resurgence in the travel industry. While we all hope that’s the case, there’s a good possibility that it will take longer than expected.

Like most of the industry, shares of Bookings Holdings took a major beating early in 2020 as the Covid-19 pandemic mostly shut down both business and vacation travel. Airlines, hotels and cruise lines now mostly trade at big discounts to their pre-pandemic highs. Former rental car giant Hertz missed scheduled debt payments and filed for Chapter 11 bankruptcy in 2020, wiping out the entire value of shareholder equity.

Booking shares have fully recovered from the March selloff and are now up a bit on the year. It’s great to see that optimism, but there’s a case to be made that the current valuation is overly optimistic.

Formed as Priceline during the 1990s internet boom, the company not only survived the technology crash of the early 2000s, it went on a furious M&A binge that made it the world’s largest operator of travel search engines and fare aggregators. The brand includes Booking.com, Priceline, Kayak.com, OpenTable and many other travel and leisure related businesses in 200 countries worldwide.

In good times, it’s a money machine. The ubiquity and ease of use of its product offerings make Booking the go-to place for internet travel searches. The fact that they don’t have any of the hassles involving physical goods or locations means that every transaction contributes more or less directly to the bottom line. Compared to travel companies that have to buy and maintain planes, boats, cars and real estate properties, Booking has an extremely “clean” business.

Unfortunately, these are not good times for the industry as a whole. Despite the impending rollout of two different FDA-approved vaccines, the numbers of infections and deaths continue to rise to new highs. Most state governments and health officials are specifically imploring people not to travel during the holiday season.

After 9 months of severe restrictions on travel, there’s certainly a lot of pent-up demand for vacation opportunities – but when those trips will actually happen is the subject of debate.

Even the rosiest scenario for the vaccination effort means that it will be the Summer of 2021 before a significant enough number of Americans have developed immunity that will allow in-person activities to resume safely. Logistical challenges and some remaining reluctance to take the vaccine threaten to slow the process.

It could be well into next year before the travel industry is firing on all cylinders again and the Zacks Consensus Earnings Estimate for BKNG in the first quarter reflects that, calling for a loss of ($2.51)/share – versus a profit of $3.77/share in the same period a year earlier. Things get much more optimistic after that and full year 2021 net earnings are expected to rebound all the way to $54.10/share.

Including the Q1 loss, that would mean the company is earning an average of almost $19/share in the next three quarters – and it seems to be supporting the share price.

At $2,105/share, Booking Holdings trades at a forward 12-month P/E ratio of 455X. Big P/E ratios are not unheard of – especially for technology companies that are capable of ramping up revenues and earnings quickly, but the optimism for BKNG seems extreme. It wouldn’t take much to extend the pain of lockdowns into the second or third quarter of 2021 and that $54 number would be in severe jeopardy.

Those who held Booking shares during the recovery made a great trade. It probably wouldn’t be a bad idea to take some profits off the table. Investors who are looking for a new opportunity would probably be better served with the shares of a company that doesn’t need a “best-case” scenario to meet the estimates.

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