How Increasing Rocket Stock Liquidity Could Impact the Company and Its Share Price

After Dan Gilbert, founder and chairman of Rocket Companies Inc., announced this month his intention to increase the number of shares available to public shareholders, experts are wondering what that could mean for the Detroit-based mortgage lender.

During Rocket’s first Investor Day, Gilbert spoke about reducing his personal stake in the company. Gilbert said during a call with Rocket Companies CEO Bill Emerson that his plan to sell some of his stake is not a long-term idea. It could happen in the short or medium term, he said.

“I certainly don’t need to own 93% of the business,” Gilbert said. “I want to own a piece, but I don’t need to own that much, and the more shares we can put out there, the better, whether that’s through secondary deals or really interesting acquisitions.”

It’s unusual for a public company to have such a small number of shares — known as its free float — available, said Jay Ritter, a finance professor at the University of Florida. Even more unusual, he added, is that the vast majority are owned by the chairman or chief executive officer.

“Almost all technology and biotech companies have used venture capital funding,” which results in cross-ownership among multiple parties, Ritter said.

Gilbert also has 10 votes per share, giving him overwhelming control over the company. That means investors must have a great deal of trust in him and his decision-making, Ritter said. Doubts surrounding WeWork Inc. founder Adam Neumann have fueled the office space company’s IPO.

During his Investor Day appearance, Gilbert noted that potential acquisitions could help increase the amount of company shares available to the general public.

“We definitely want to increase the number of shares outstanding,” he said. “We think it makes sense for a company our size and for being listed on the New York Stock Exchange.”

Gilbert’s comments came after the CEOs outlined Rocket’s strategic goals, which include growing its market share.

Rocket shares have recently traded in a range of $19-$20 on the New York Stock Exchange, down from their initial public price of $18 in August 2020. The stock’s 52-week low is $7.17 and high is $21.38. It rose to $41.60 per share in March 2021 via retail investors on Reddit. Gilbert sold $500 million worth of shares in March 2021.

Gilbert isn’t the only mortgage lender with a large stake in his company. United Wholesale Mortgage Holdings Inc. CEO Mat Ishbia and his family have a large stake in the company. Ishbia owned 93% of the stock, according to August SEC filings.

When asked to discuss Ishbia’s plans for his action, UWM declined to comment.

About 30% of technology company IPOs have dual-class shares, and over the past seven years, at least 20% of IPOs have been dual-class, up from about 10% in the 1980s.

Some are the result of spin-offs. Others are founders who want to avoid a hostile takeover. Some dual-class structures are for a limited number of years.

“Many institutional investors prefer the ‘one share, one vote’ principle,” Ritter said.

However, when companies that have dual share classes, such as Meta Platforms Inc. and Alphabet Inc., do well, they continue to attract investment.

Institutional investors may have restrictions on the stocks they invest in. Companies typically prefer a 15% to 20% float, and IPOs typically have at least 10% of available shares, said Kevin Heal, an analyst at investment firm Argus Research.

“They have no say in governance” when the number of shares is so small, Heal said of investors. “You can’t affect any change by owning shares. They may have a minimum limit on the number of shares available for trading.”

Qualifying for institutional investor interest increases demand for a stock, which can boost the stock price, Heal said. It can also help stabilize the stock. When a stock is mostly traded by day traders, it can cause more volatility.

Rocket has historically been one of the most shorted stocks and has been subject to the “meme stock” craze experienced by companies like GameStop Corp. In March 2021, the stock closed at a high of $41.60. At other times, the stock has closed below $7.

Increasing the number of shares available will cause the price to fall, and because there are so few shares available, such a move can have drastic effects, Heal said.

“Usually in a secondary offering, the shares are usually sold at a much lower price,” he said. “You’re adding more shares to the market, so it has to digest that.”

Rocket shares were trading at $18.82 on Friday afternoon, just above its 2020 IPO price of $18. However, when adjusted for inflation, the stock is now trading at $21.87, according to the Federal Reserve Bank of Minneapolis’ inflation calculator.

This has consequences not only for Rocket’s outside investors: “Employees will not be happy if the stock does not go up,” Ritter said.

But 2020 has been a boom for IPOs. Many have lost value, Ritter said.

“At the time, the market was willing to pay pretty high multiples for growth stocks,” he said. “The fact that Rocket was able to maintain its share price reflects two things: It has a legitimate business that’s doing well. And unlike most other growth stocks that have gone public, it hasn’t disappointed investors.”

The Fed’s half-percentage-point rate cut this week will be a boon for businesses, but it was already priced into stocks a month ago, Heal said. AI will also help boost productivity and cut costs, and potentially workers, Heal said.

As Heal noted, the stock has returned to its initial public offering level, but interest rates were lower then and the company was issuing many times more mortgages than it does now.

“There are a lot of smaller entities, a lot of people who are day trading these stocks,” he said. “Fundamentally, the stock is still too expensive based on earnings and expected future. You’re betting on more growth.”

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