As Rocket Companies (NYSE:RKT) climbs 4.9% this past week, investors may now be noticing the company's one-year earnings growth

By
Simply Wall St
Published
March 23, 2022
NYSE:RKT
Source: Shutterstock

Passive investing in an index fund is a good way to ensure your own returns roughly match the overall market. But if you buy individual stocks, you can do both better or worse than that. That downside risk was realized by Rocket Companies, Inc. (NYSE:RKT) shareholders over the last year, as the share price declined 53%. That's well below the market return of 8.1%. Rocket Companies may have better days ahead, of course; we've only looked at a one year period. Furthermore, it's down 29% in about a quarter. That's not much fun for holders. We note that the company has reported results fairly recently; and the market is hardly delighted. You can check out the latest numbers in our company report.

On a more encouraging note the company has added US$61m to its market cap in just the last 7 days, so let's see if we can determine what's driven the one-year loss for shareholders.

Check out our latest analysis for Rocket Companies

To quote Buffett, 'Ships will sail around the world but the Flat Earth Society will flourish. There will continue to be wide discrepancies between price and value in the marketplace...' By comparing earnings per share (EPS) and share price changes over time, we can get a feel for how investor attitudes to a company have morphed over time.

Even though the Rocket Companies share price is down over the year, its EPS actually improved. It's quite possible that growth expectations may have been unreasonable in the past.

It's surprising to see the share price fall so much, despite the improved EPS. But we might find some different metrics explain the share price movements better.

We don't see any weakness in the Rocket Companies' dividend so the steady payout can't really explain the share price drop. We'd be more worried about the fact that revenue fell 17% year on year. So it seems likely that the weak revenue is making the market more cautious about the stock.

You can see below how earnings and revenue have changed over time (discover the exact values by clicking on the image).

earnings-and-revenue-growth
NYSE:RKT Earnings and Revenue Growth March 23rd 2022

Rocket Companies is well known by investors, and plenty of clever analysts have tried to predict the future profit levels. If you are thinking of buying or selling Rocket Companies stock, you should check out this free report showing analyst consensus estimates for future profits.

What About Dividends?

As well as measuring the share price return, investors should also consider the total shareholder return (TSR). Whereas the share price return only reflects the change in the share price, the TSR includes the value of dividends (assuming they were reinvested) and the benefit of any discounted capital raising or spin-off. It's fair to say that the TSR gives a more complete picture for stocks that pay a dividend. In the case of Rocket Companies, it has a TSR of -50% for the last 1 year. That exceeds its share price return that we previously mentioned. This is largely a result of its dividend payments!

A Different Perspective

Given that the market gained 8.1% in the last year, Rocket Companies shareholders might be miffed that they lost 50% (even including dividends). While the aim is to do better than that, it's worth recalling that even great long-term investments sometimes underperform for a year or more. With the stock down 29% over the last three months, the market doesn't seem to believe that the company has solved all its problems. Basically, most investors should be wary of buying into a poor-performing stock, unless the business itself has clearly improved. It's always interesting to track share price performance over the longer term. But to understand Rocket Companies better, we need to consider many other factors. For instance, we've identified 3 warning signs for Rocket Companies (1 can't be ignored) that you should be aware of.

If you like to buy stocks alongside management, then you might just love this free list of companies. (Hint: insiders have been buying them).

Please note, the market returns quoted in this article reflect the market weighted average returns of stocks that currently trade on US exchanges.

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