Rocket Companies Inc. (RKT) shares were active again Wednesday as the mortgage lender finds itself in the midst of a short-squeeze potentially fueled by retail investors motivated by comments on the r/Wallstreetbets chatroom.
Rocket Companies, which is controlled by Cleveland Cavaliers owner Dan Gilbert, has more than doubled in value over the past five days despite being one of the most heavily-bet against stocks on Wall Street. The move appears to echo a similar run in shares of GameStop, the money-losing video game retailer that came to define the power of individual investors in their battle with hedge funds and short sellers when it soared more than 1600% from late January into early February.
Data from S3 Partners, a research group that tracks short positions, notes bets against the stock of around $1.2 billion, or 45.8% of the shares outstanding. That puts Rocket second on the group's list of shorted stocks, just behind Root Inc. (ROOT) and just ahead of Senseonics Holdings (SENS) .
"We once again are seeing a long buying vs short selling battle. But in addition to the Reddit-based buying activity, we are seeing in both the equity and call option markets; we are also seeing value investors buying Rocket stock based on their better than expected 1st quarter guidance and strong mortgage activity," said S3 analyst Ihor Dusaniwsky. "Short sellers may be outnumbered and out gunned in this battle and the short squeeze may come sooner rather than later."
Rocket shares were marked 18% lower in early trading Wednesday -- and were one of the most active stock on the NYSE -- to change hands at $34.30 each, a move that would trim the stock's five-day gain to around 80%.
Short sellers are investors who bet against a certain stock by selling it by borrowing them from another investor and selling them on various exchanges or platforms in the hope of buying them back at a lower price in the future and pocketing the profits.
Wall Street pros argue that short sellers provide several key functions in the market, including price discovery and additional liquidity, while critics counter that some rely on "predatory" practices that can damage companies and wipe-out small investors.
In the case of GameStop, and possibly Rocket Companies, options markets have been the catalyst for share price moves against short sellers in what is often referred to as a 'gamma squeeze'.
A call option buyer has the right, but not the obligation, to own shares of a company at a certain price at some specified point in the future.
He or she might think owning a call option on Rocket with a $75 strike price when shares are trading at $40, is a better way to play the stock's momentum.
Options sellers, meanwhile, will often buy the underlying stock in the open market as its price moves higher, in order to hedge their risk, creating a virtuous, but potentially ephemeral, a circle of ever-higher prices.
"Rocket's stock price and short selling activity is reminiscent of another recent high flying meme stock – Gamestop," said S3's Dusaniwsky. "Both stocks saw their share price spike due to high retail buying interest (predominantly due to significant social media activity) and an options-based gamma squeeze."
"Both stocks also had\have relatively high short interest and high stock borrow rates which imply strong short-selling demand and very limited stock borrow supply," he added.