3 Recent IPOs with the Highest Short Interest

: RKT | Rocket Cos. Inc. News, Ratings, and Charts

RKT – Despite a global slowdown caused by the COVID-19 pandemic last year, the past decade has witnessed the highest-ever capital raising activity through IPOs. However, among those issuers there were some names that failed to benefit from an uptrend in secondary market trading. Rocket Cos. (RKT), GoodRx Holdings (GDRX) and Dada Nexus (DADA) are three newly listed companies whose stock has accumulated a large short position over the past months, which indicates potential trouble for these stocks ahead. However, if the market continues to move higher and short sellers eventually close out their positions, these stocks could see price increases. Let’s explore this further.

The COVID-19 pandemic precipitated the biggest economic crisis of the century. However, the stock market recovered and galloped ahead after a major correction last  March. This bullish sentiment has been reflected in the primary stock market, which saw a surge in initial public offerings (IPOs) on U.S. exchanges last year.

IPOs are an essential vehicle through which  privately owned companies can  raise money. FactSet data shows that the volume of IPOs in 2020 more than doubled versus 2019 to a record 494 IPOs–the highest annual number in the past two decades. In aggregate, these newly listed companies raised $174 billion in 2020, representing a 150% increase over the prior year.

However, the rising tide did not lift all boats and some of the newly listed companies were viewed with skepticism by investors. Investors’ bearish sentiments are often captured in their short-selling activity, through which they bet against stocks that they believe are overvalued relative to their fundamentals or other factors, and are vulnerable to a pullback.

Short percentage of float is a commonly used metric to measure how aggressive a stock’s short sellers have been. The short percentage of float is defined as the portion of a company’s total available shares for public trading (or floating shares) shorted by traders. In recent weeks, many investors have been introduced to the short squeeze, a phenomenon that sent shares of struggling businesses like GameStop (GME) and AMC Entertainment (AMC) skyrocketing. It is likely that the current  bullish market may witness more short squeezes in the near term.

Rocket Cos. Inc. (RKT), GoodRx Holdings, Inc. (GDRX) and Dada Nexus Ltd. (DADA) are three recently listed companies that have been aggressively shorted by investors, raising red flags. But steadily improving economic activity and short covering should help these stocks move higher.

Rocket Cos. Inc. (RKT)

RKT is a Detroit-based holding company that consists of personal finance and consumer service brands including Rocket Mortgage, Rocket Homes, Rocket Loans, Rocket Auto, Rock Central, Amrock, Core Digital Media, Rock Connections, Lendesk and Edison Financial. RXT was founded in 1985 and was  listed in  August 2020.

Its  highly anticipated stock market debut t was priced at $18 per share, below the original target of $20 to $22. But the stock quickly gained 19.5% in secondary market trading. RKT is up nearly 3.6% in the past month. However, the stock’s current short interest is 36.7% of the total share float, which indicates that more than one-third of the stock has been sold short.  RKT is currently  trading nearly 39% below its all-time high of $34.42.

RKT’s flagship company, Rocket Mortgage, is the U.S.’  largest mortgage lender. Last week it launched a national mortgage broker directory. The directory makes it easier for homeowners  to refinance their current loans, including an option to process the application though a local independent mortgage broker. In addition, Nexsys Technologies, the Fintech subsidiary of RKT, recently released its Clear HOI platform to digitize and automate communications between mortgage lenders and homeowner insurance (HOI) companies.

RKT is scheduled to issue its fourth quarter and full-year 2020 earnings on February 25. In the third quarter ended September 30, RKT reported adjusted revenue of $4.74 billion, increasing 163% year-over-year. It closed origination volume during the quarter increased 122% year-over-year to a record $89 billion on back of the low interest rate environment. The company saw net rate lock volume of $94.7 billion, doubling from the prior year. Its net income surged a mammoth 506% year-over-year to $3 billion.

On January 29, the stock gained as much as 14.5% to hit an intraday high of $24.30 despite no big headlines. Following this, CEO Jay Farner issued a word of caution to  short sellers, noting that  that RKT is “not a stock you want to be short in.” He added, t “We’ve got a great track record and a lot of exciting things we are working on.” Wall Street analysts expect RKT’s EPS to grow 26.8% per annum in the next five years. Hence, the stock could  soon witness a short-covering rally.

RKT’s weak fundamentals are reflected in its POWR Ratings. The stock has an overall rating of C which equates to Neutral in our POWR Ratings system. The POWR Ratings are calculated by considering 118 different factors with each factor weighted to an optimal degree.

RKT also has a grade of C for Growth, Momentum, and Quality. In the 105-stock Financial Services (Enterprise) industry, it is ranked #61.

In total, we rate RKT on eight different components. Beyond what we stated above, we also have given RKT grades for Value, Stability, and Sentiment. Get all the RKT ratings here.

GoodRx Holdings, Inc. (GDRX)

GDRX is a holding company that owns and operates a prescription drug price comparison platform using data from local and mail-order pharmacies in the U.S.  As America’s leading resource for healthcare savings, GDRX connects consumers with affordable and convenient prescriptions and medical care, including telehealth, mail-order prescriptions, doctor visits, and lab tests.

Since its inception in 2011, GDRX has  achieved remarkable growth and has been a major disrupter in the prescription marketplace. It completed its IPO in September 2020, selling more than  39.8 million common shares at  $33 per share. GDRX has gained nearly 27% in the past month. Despite the rally, the stock has a short float of 31.2%. GDRX is currently  trading at a 20.3% discount to its 52-week high of $64.22.

The massive short position in GDRX stock could be related to a series of class action lawsuits that accuse the firm of issuing materially false and/or misleading statements in its  registration statement and deceiving  the investing public regarding its business, operations, services, competition, competitive market trends and present and future business prospects. The complaint alleges the company timed its  IPO before Amazon.com (AMZN) announced its online pharmaceutical business to  artificially inflate its share price.

On December 16, GDRX expanded the benefits of  its subscription program, GoodRx Gold, under which members can  receive exclusive discounts on online doctor visits and free mail delivery via its app, in addition to exclusive lower prices on prescription drugs that are already available. And back in October, GDRX announced a three-year renewal agreement with Kroger Health, the healthcare division of Kroger Co. (KR), to enable customers to use the Kroger Rx Savings Club program to  reduce costs for prescription drugs.

In the third quarter, GDRX’s sales came in at $140 million, increasing 38% year-over-year. Its prescription transactions revenue grew 30% year over year to $124.4 million, driven by 29% year-over-year growth in its  monthly active consumers. Despite delivering strong growth in its subscriptions, GDRX reported a loss of $50 million, compared to the year-ago profit of $19.6 million.

GDRX is surely benefitting from the rapidly transforming consumer markets on the back of technology, greater transparency and convenience. However, even if the lawsuits against it fail,  established players like AMZN and CVS Health (CVS) are a  threat to GDRX’s market share. Nevertheless, GDRX’s expanding suite of offerings makes analysts believe its current year revenue will  rise 35.3% but its EPS will  decline further to 2.9%.

GDRX’s POWR Ratings reflect this bleak outlook. The stock has an overall rating of C, which equates to Neutral in our POWR Ratings system. The POWR Ratings are calculated by considering 118 different factors with each factor weighted to an optimal degree.

GDRX has a grade of D for Stability, and a grade of C for both Growth and Sentiment. It is ranked #130 of 239 stocks in the Medical – Pharmaceuticals industry.

In addition to the POWR Ratings grades I have just highlighted, you can see the GDRX’s ratings for Value, Momentum, and Quality here.

Dada Nexus Ltd. (DADA)

DADA operates on-demand retail and delivery platforms in China. The company operates JDDJ, a local on-demand retail platform, and Dada Now, a local on-demand delivery platform in China. The company’s two platforms are interconnected and mutually beneficial. DADA was founded in 2014, but the company was  listed in June 2020.

Despite  U.S.-China trade tensions that spilled into the financial sector, DADA pressed ahead with its IPO and returned almost 16% in post-listing trading. The stock is up nearly 40% in the past three months to close yesterday’s trade at $44.74. However, short sellers account for 28% of the float, which indicates that the stock is highly shorted.

DADA recently announced a new strategic partnership with Ferrero, a leading global chocolate and confectionery manufacturer, to create a new on-demand retail model for snack foods. Through the agreement, JDDJ is further promoting the digitalization of the snack food industry with win-win partnerships while increasing its online sales. In addition, JDDJ has accelerated its geographic expansion into lower-tier markets and established new partnerships with more than 20 regional supermarket leaders last month.

In the third quarter ended September 30, 2020, total net revenue increased 85.5% year-over-year. The company delivered 74.4 million orders on its Dada Now platform during the quarter. Consequently, JDDJ’s total gross merchandise volume surged 131% versus the year-ago value. Its number of active consumers came in at 37.3 million, an increase of 77.1% year-over-year. However, the company is still not profitable and reported an operating loss of $68.57 million.

DADA is witnessing a strong growth in its user base and is further strengthening its position with market share expansion. But investors are cautious regarding news of a follow-on  stock offering that will further dilute DADA’s shareholding. In December, the company announced that it will issue  nine million American Depositary Shares (ADS), representing 36 million shares of ordinary common stock and invest the proceeds in technology and research and development. However, the stock may turn around; Wall Street analysts expect DADA’s current year revenue and EPS to rise 57.7% and 32.5%, respectively.

It is no surprise that DADA has an overall rating of D which equates to Sell in our POWR Ratings system. The POWR Ratings are calculated by considering 118 different factors with each factor weighted to an optimal degree.

 

DADA also has a grade of D for Value, Stability and Quality. In the 81-stock Technology – Services industry, it is ranked #69.

Click here to see the additional POWR Ratings for DADA (Growth, Momentum, and Sentiment).

 

 

 

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RKT shares were trading at $21.60 per share on Wednesday afternoon, up $0.66 (+3.15%). Year-to-date, RKT has gained 6.82%, versus a 2.33% rise in the benchmark S&P 500 index during the same period.


About the Author: Sidharath Gupta


Sidharath’s passion for the markets and his love of words guided him to becoming a financial journalist. He began his career as an Equity Analyst, researching stocks and preparing in-depth research reports. Sidharath is currently pursuing the CFA program to deepen his knowledge of financial anlaysis and investment strategies. More...


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