Low interest rates and work-from-home orders have driven housing sales during the pandemic as the cost of mortgages declined and people realized they needed more space. This led to the current housing shortage, which was further exacerbated by COVID shutdowns and lumber scarcities. These developments have given Rocket Companies (NYSE: RKT), the number one mortgage company in the world, and UWM Holdings Corp (NYSE: UWMC), the number two, a stellar year in 2020.
Recently, Rocket started to make inroads in the wholesale market and as a result, UWM announced that it will not do business with any brokers that also do business with its competitor. In this competitive scenario, we ask which is the better investment right now, Rocket Companies or UWM Holdings?
Rocket Companies: Bulls vs bears
According to the company’s 2020 annual report, Rocket Companies’ revenue was up 187%, its net income rose by 526%, and loan origination volume grew by 121%, year over year (YoY). Additionally, its incremental closed volume of $175 billion was more than double the growth of any other lender in business and it even grew its auto unit sales by 161%. The parent company of Quicken Loans, Rocket Mortgage, LowerMyBills, and many others, Rocket was one of the first companies in the industry to go digital and will continue to reap the rewards of doing so as millennials make up more than 37% of the current homebuyer’s market.
Digitization also cuts overhead costs and gives Rocket an operating margin of 62%, the highest in the industry. This affords the company flexibility for operations like its recent partnership with Morgan Stanley to originate, close, and service its Fannie Mae and Freddie Mac loans.
As they say on ‘Game of Thrones’, “Winter is coming,” and for the mortgage industry, it’s coming in the form of rising interest rates. Rising rates have already impacted the company’s gain-on-sale margin (gross profit made on each loan), which declined 26% to 3.25% in the first quarter of 2021. Further, Rocket’s outlook for the second quarter indicates further drops in the range of 2.65% to 2.95%. Rising rates will also impact the company’s refinance, auto, and personal loan business. And lastly, UWM’s announcement forced 3,000 of 4,600 brokers to abandon Rocket for the more broker-friendly UWM.
UWM Holdings: Bulls vs bears
United Wholesale Mortgage, which is about a third of the size of Rocket by market cap, also had a remarkable 2020. As per its Q1 report, revenue is up 166%, net income surged a whopping 4,100%, and loan origination volume grew by 16%, YoY. As the biggest wholesale mortgage company, UWM’s business model relies strongly on volume, and as such its cost per loan is roughly $5,800, significantly less than the industry standard of $8,872.
Volume alone does not contribute to such an efficient business model; technology plays a key role as well and the company has it in spades. With robotic process automation (RPA), UWM is able to cut closing costs, increase loan processing speed and ultimately drive down overall loan-associated expenses. The company projects origination to be in the $51 to $55 billion range in Q2, a potential 12% increase from Q1 to be “one of the only mortgage companies in America that grows in a rising rate environment,” according to CEO Mat Ishbia. The company also anticipates taking the crown from Rocket to become the number one lender by 2024.
Aside from facing headwinds from rising interest rates for both its origination and refinance business, UWM also is facing a class-action lawsuit from a large group of mortgage brokers in Florida over its broker ultimatum. The company’s stock price has also seen volatility earlier in the year thanks to being part of the meme stock group on Reddit.
So, which is a better investment right now?
Both companies will face interest rate headwinds in the near future but I feel UWM is poised to weather the storm with its volume-centric business model. UWM’s stock price is also about half that of Rocket’s but I’d wait for another dip and purchase after the Q2 report is released to see if the company’s projections hold.
While both of these companies are poised to benefit from the current housing market, we’ve got a couple of better growth alternatives in the MyWallSt shortlist we’d like to share with you today. To get access, simply click here for a free 7-day trial today.
MyWallSt operates a full disclosure policy. MyWallSt staff currently holds long positions in companies mentioned above. Read our full disclosure policy here.
Contributing Writer at MyWallSt
David fell in love with the stock market in 2000 after making $30,000 overnight on Techniclone. His favorite stocks today are Netflix, Google, Amazon, and Apple as they are the market leaders in their sectors and are safe long-term investments.