The financial services industry has seen solid growth this year thanks to the fast-paced economic recovery and rising financial activities by individuals and businesses. The industry’s promising outlook has proved appealing to investors, as evidenced by the Financial Select Sector SPDR ETF’s (XLF) 60.7% returns year-to-date, compared to SPDR S&P 500 ETF Trust’s (SPY) 14.8% gains.

The global financial services market is expected to grow at a 6% CAGR over the next five years to hit $28.5 trillion by 2025.

But despite the bullish sentiment toward the industry, highly discussed stocks on Reddit’s wallstreetbets (WSB) chatroom—Rocket Companies, Inc. (RKT) and UWM Holdings Corporation (UWMC)—exhibit  bleak growth prospects. Analysts expect their revenue and EPS to decline in the near term. Thus, we think these stocks are best avoided now.

Rocket Companies, Inc. (RKT)

RKT provides a suite of services related to homeownership and other personal financial needs. The company operates through two segments—Direct to Consumer and Partner Network. Its Rocket Mortgage app helps clients to apply for a mortgage, interact with its team members, upload documents, receive statements, and complete monthly payments. It also gives access to mortgage calculators to help customers  choose the solutions appropriate to  supporting their financial goals.

RKT shareholders  have filed class action lawsuits against RKT after the company reported a decline in its closed loan origination volume quarter-over-quarter and forecasted additional declines in the second quarter. And in May, The Schall Law Firm announced that it is currently investigating whether RKT has violated security regulations and breach of fiduciary duty.

RKT’s adjusted revenue decreased 15.4% sequentially to $4.04 billion for the fiscal 2021 first quarter ended March 31. The company’s $3.55 billion net gain from the sale of loans represents a 15.7% decline from the fourth quarter of 2020. Its adjusted net income came in at $1.77 billion for the quarter, which represents a 21.7% decline from the prior quarter. Its adjusted EPS has decreased 21.9% sequentially to $0.89.

A  $0.45 consensus EPS estimate  for the next quarter, ending September 30, represents a 62.8% year-over-year decline. Also, the $2.57 billion consensus revenue estimate for the same quarter, represents a 43.6% decline from the prior-year period. RKT has lost 22.4% over the past month and ended yesterday’s trading session at $16.68.

RKT’s poor prospects are also apparent in its POWR Ratings. The POWR Ratings are calculated by considering 118 different factors, with each factor weighted to an optimal degree.

The stock has an F grade for Sentiment, and a D grade for Growth and Stability. In addition to the POWR Ratings grades we’ve just highlighted, one can see RKT’s ratings for Value, Quality and Momentum here.

The stock is ranked #64 of 102 stocks in the D-rated Financial Services (Enterprise) industry.

UWM Holdings Corporation (UWMC)

UWMC is a wholesale lender that underwrites and provides closing documentation for residential mortgage loans originated by independent mortgage brokers, correspondents, small banks, and local credit unions. It also provides training, technology, marketing support, and more, to help its entrepreneurial partners.

UWMC’s United Wholesale Mortgage, LLC (UWM) subsidiary priced an  offering of $700 million of senior notes on March 30. The company intends to use the  proceeds to repay outstandings under its MSR facility and the remainder for general corporate purposes.

On March 24, in a CNBC interview, UWMC’s CEO said that the company would no longer work with any mortgage brokers that  also conducted business with Quicken Loans (owned by Rocket Companies, Inc. (RKT)) and Fairway Independent Mortgage. In issuing this ultimatum to mortgage brokers, UWMC’s CEO alleged that  both Quicken and Fairway are engaging in behaviors that inhibit mortgage brokers from growing their share of the overall business.

UWMC’s total revenue decreased 34.6% sequentially to $1.19 billion for its fiscal year 2021 first quarter, ended March 31. The company’s revenue from  loan production income came in at $1.07 billion, which represents a 35.5% decline sequentially. Its adjusted net income was  $665.32 million, down 36.4% from the prior quarter. Its closed loan volume has decreased 10.2% sequentially to $49.09 billion.

Analysts expect UWMC’s EPS to be $1.32 for its  fiscal year 2022, which indicates a 9% decline year-over-year. Also, a $3.47 billion consensus revenue estimate for the same fiscal year represents a 17.8% year-over-year decline. UWMC has declined 27% over the past three months and ended yesterday’s trading session at $7.38.

UWMC’s POWR Ratings are consistent with this bleak outlook. The stock has an overall D rating, which equates to Sell in our proprietary rating system.

The stock has a D grade for Sentiment, Value, Quality and Stability. We have also graded UWMC for Growth and Momentum. Click here to access all UWMC’s ratings.

UWMC is ranked #49 of 51 in the C-rated Consumer Financial Services industry.

RKT shares were trading at $16.58 per share on Thursday afternoon, down $0.10 (-0.60%). Year-to-date, RKT has declined -18.00%, versus a 10.10% rise in the benchmark S&P 500 index during the same period.

About the Author: Sweta Vijayan

Sweta is an investment analyst and journalist with a special interest in finding market inefficiencies. She’s passionate about educating investors, so that they may find success in the stock market. More...

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