Shares of Rocket Companies drop 30% after a 70% irrational pop in the heavily shorted name

Shares of Rocket Companies slide after Reddit-driven rally
Shares of Rocket Companies slide after Reddit-driven rally

Shares of Rocket Companies dropped more than 30% Wednesday following a surprise rally in the previous session, as Wall Street analysts raised red flags on the frenzy trading.

The online mortgage provider's stock came under pressure after soaring more than 70% Tuesday for its best day ever with no apparent news. Rocket is one of the most heavily shorted names by hedge funds, with nearly 40% of its available shares sold short, which may have made it attractive to the Reddit trading crowd.

The stock ended Wednesday 32.7% lower at $28.01, giving back most of the gains in the previous session. Shares started the week at $21.85 apiece.

Analysts started to urge caution in the heightened speculative trading in Rocket shares. JPMorgan said fundamental investors should take their chips off the table after the massive jump.

"In light of the sharp rise in share prices, we believe fundamental investors should take profits," Richard Shane, JPMorgan's equity strategist, said in a note. "While similar high velocity, high volatility events have created sustained speculative opportunities, we believe core, long-term investors will be able to rebuild positions at lower price levels."

JPMorgan has an underweight rating on the company, and its $20 price target would translate into a 50% decline from Tuesday's close of $41.60.

RBC Capital Markets analyst Daniel Perman downgraded the stock to sector perform from outperform on Wednesday, citing "abnormal volatility" in the name. RBC's price target of $30 per share was unchanged, implying a decline of more than 27% for the stock.

While it's hard to quantify how much of Tuesday sudden rally was driven by Reddit-obsessed day traders, Rocket has been featured in top posts on the infamous WallStreetBets this week.

On Wednesday, one Reddit user said "$181,840 gain in 4 hours from $RKT. Time to give my wife that wedding she always wanted." The post has more than 2,500 replies.

Some say the surge in Rocket is reminiscent of the retail trading mania seen in GameStop that gripped Wall Street earlier this year. In January, a band of retail investors on Reddit coordinated a historic short squeeze in the video game retailer, which created huge losses for some hedge funds.

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