Most Wall Streeters can tell you that the time to step away from the desk and 'live a little' is when the VIX is low, and stocks aren't set to move as quickly. However, the veterans will correct that lesson and tell you that quiet VIX times are when you need to hone into an excellent strategy to make money once volatility pops.
If you stay ready, you don't have to get ready. Today, you can get ready by pinpointing some of the end branches that will benefit from Buffett's latest investment in the real estate sector, namely in homebuilders. Now that both housing inventory is set to rise, at the same time that the FED is proposing rate cuts going into 2024, a single stock should come into your crosshairs.
That stock is Rocket Companies (NYSE: RKT). Think about it: lower mortgage rates combined with a sudden injection of new housing inventory can cause a roll-up of buyers to show up and sweep up the listings. However, this will not be likely to happen if companies like Rocket don't stand ready to provide said mortgages and other financing solutions!
That's the situation
Following the Vanguard Real Estate ETF (NYSEARCA: VNQ), especially its performance against the Technology Select Sector SPDR Fund (NYSEARCA: XLK), will give you a better glimpse as to what is currently about to happen to companies like Rocket.
On a year-to-date basis, the two charts are seen growing farther apart. Numbers first, the technology sector outperformed real estate by as much as 49.6% during the period. So what does this mean?
Buffett decided to get in at ground-zero of the new real estate wave for the same reason options traders decided to stampede into Rocket stock calls.
As a refresher, a call option is a way to bet on the upside of an underlying stock as a form of leverage. Because options cost a fraction of the cost of buying actual stock, you can generate high returns in a short period of time.
That only happens IF you get the direction and timing right, which means being wrong in either can also instantly wipe out your entire position. Knowing that MarketBeat's scanner for unusual call options volume caught Rocket stock recently, you best bet that traders feel confident in an upcoming upside move.
Of course, there is a fundamental reasoning behind these trades, and breaking them down can help you better gauge the possibility of riding along with the potential outcome from this stock.
Is it real?
To markets, it is, especially judging by the price action in the stock so far. Despite real estate being flat (per the ETF) this year, Rocket still soared to 98.0% of its 52-week high prices, meaning that the markets are bullish on this name. Will they continue to be? Don't fight the trend.
But there are other ways that the market is placing their faith in this stock for the coming months. You see, the forward price-to-earnings ratio is the market's favorite way of putting a value on the future earnings potential for a stock, and the higher these multiples go, the better.
A higher forward P/E means that markets are willing to pay more today for the future earnings of a stock, which can translate to them being excited about something. With Rocket, markets may be excited at the fact that analysts expect a 425.0% jump in EPS coming in the next twelve months.
Because of this projection and the logical understanding that mortgage activity is about to boom, it should be no surprise that the stock trades at a 37.8x forward P/E, which is 36.0% higher than the industry's average 27.8x multiple.
But how can markets be so confident about this coming growth? After all, 425.0% growth in EPS is kind of obscene. The company's third quarter 2023 investor presentation can paint a better picture for you.
With a client retention rate of over 90.0%, you can expect that not only repeat customers but also new ones will come to request services once the peer pressure of buying a home sets in.
Of course, nothing is guaranteed, not even in a market facing potential rate cuts from the FED, but often one plus one equals two. In the case of Rocket, markets say it is the one, and Buffett says the real estate sector is the other one; maybe a potential investment here can equal the two for your portfolio.
