Rocket Companies (RKT): Navigating Legal Storms and Margins – Is Now the Time to Buy?

The mortgage giant Rocket Companies (RKT) is grappling with a dual legal crisis that has cast a shadow over its stock price and operational resilience. From securities fraud allegations to a landmark racial discrimination lawsuit, investors face a critical decision: Is RKT's current valuation a buying opportunity or a risk-laden trap? Let's dissect the legal landscape, margin dynamics, and valuation to uncover the truth.

The Legal Headwinds: A Two-Front Battle

Rocket Companies is embroiled in two major lawsuits that threaten its financial stability and reputation:

1. Securities Fraud Class Action (March 2021 – Present):
2. Allegations: Investors claim Rocket misled them about its gain-on-sale margins, which were collapsing due to intense competition and a shift toward lower-margin Partner Network loans.
3. Impact: When the truth emerged in May 2021, RKT's stock plummeted 17%, and the lawsuits now seek recovery for shareholders who bought during the Class Period (March 29–April 1, 2021).

4. Deadline Alert: Investors must act by July 8, 2025, to seek Lead Plaintiff status.

5. DOJ Discrimination Lawsuit (October 2024 – Ongoing):

6. Charges: The U.S. Department of Justice accuses Rocket Mortgage and its partners of racial bias in a Denver appraisal, undervaluing a Black homeowner's property by $200K+ and canceling her refinance. This case could set a precedent for lender liability in appraisal bias.
7. Rocket's Defense: The company countersued HUD, arguing that federal appraisal independence laws (e.g., FIRREA) prevent lenders from intervening in appraisers' work. A ruling could hinge on whether Rocket's compliance with these laws shields it from liability.

Margin Compression: The Elephant in the Room

The lawsuits amplify concerns about Rocket's core profitability. Key issues:

• Declining Margins: Gain-on-sale margins dropped to 2.65–2.95% in early 2021, reversing a two-year trend of record highs. Analysts warn that shifts to lower-margin Partner Network loans (now 50%+ of originations) and a price war with competitors could sustain this compression.
• 2025 Outlook: Rocket's Q1 2025 earnings report showed margins at 2.8%, slightly improved but still below 2020 levels. The question remains: Can Rocket stabilize margins through cost-cutting, pricing power, or product mix shifts?

Valuation: Is the Stock Undervalued?

Despite the legal risks, RKT trades at a P/E ratio of 7.5x, below its five-year average of 12.2x, suggesting investors are pricing in worst-case scenarios. However, three factors could justify caution:

1. Settlement Costs: If the securities class action and DOJ lawsuit settle unfavorably, legal fees and penalties could dent profits. Analysts estimate a worst-case scenario of $500M+ in liabilities.
2. Regulatory Overreach: A Trump administration's potential rollback of Biden-era housing regulations might reduce compliance costs but could also delay resolution of the DOJ case.
3. Margin Recovery: If margins stabilize near 3%, RKT's earnings could rebound, lifting the stock. However, sustained compression could push the P/E even lower.

The Case for Immediate Action

For investors with a high-risk tolerance, RKT presents a contrarian opportunity:
- Catalysts for a Rebound:
- A favorable settlement by July 2025 could remove the securities lawsuit overhang.
- If the DOJ case is dismissed or settled at a low cost, the stock could rally.
- Margin stabilization in 2025 Q2/Q3 data could signal operational resilience.
- Entry Point: With shares down 40%+ from 2021 highs, the risk-reward ratio leans toward upside if lawsuits resolve positively. Historically, buying RKT on its earnings announcement dates and holding for 30 days has delivered an average return of 45.69%, though with a maximum drawdown of -66.66%. This strategy's strong absolute returns, despite a low Sharpe ratio of 0.21, suggest potential for outsized gains but underscore the need for caution due to volatility.

Backtest the performance of RKT when 'buy condition' is triggered on the earnings announcement date and holding for 30 trading days, from 2021 to 2025.

Conclusion: Proceed with Caution, but Consider Buying

Rocket Companies is a high-risk, high-reward play. While its legal battles and margin woes are valid concerns, the stock's depressed valuation and potential catalysts make it a compelling bet for aggressive investors. Monitor the July 8 deadline for the securities lawsuit and RKT's Q3 2025 earnings for margin trends. If you can stomach volatility, now might be the time to allocate a small position—but keep a close eye on developments.

Final Take: RKT's stock is priced for disaster. Investors who believe in its long-term dominance in mortgage lending and a favorable legal resolution could see outsized returns. Proceed with eyes wide open, but don't overlook the opportunity.