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What happened
Rocket companies (NYSE: RKT) plunged 33% on Wednesday after analysts warned the stock had come too far, too fast.
So what
Rocket’s share price jumped more than 70% on Tuesday in what appeared to be another short-term squeeze fueled by Reddit. Yet late last night, RBC Capital analyst Daniel Perlin downgraded his Rocket stock outperformance rating to that of the industry and reiterated his price forecast of $ 30. It was 28% below the close of Rocket action yesterday.
Rocket Companies shares lost a third of their value on Wednesday. Image source: Getty Images.
Perlin argued that the risk-reward potential for investors was “now more balanced, if not skewed downward” following the stock’s rapid rise.
Analysts at JP Morgan went even further. “In light of the sharp rise in stock prices, we believe fundamental investors should take profits,” JPMorgan strategist Richard Shane said Wednesday morning.
Many traders apparently took the comments of these analysts as a reason to sell their stocks today.
Now what
Many individual investors participate in coordinated buying campaigns on Reddit and other social media platforms. It’s a dangerous game – one that often ends in disaster.
These crowdfunding frenzies can certainly help drive a stock’s price up sharply – for a while – as we’ve seen with GameStop and now Rocket Companies. But many of these traders will exaggerate a stock to drive up its price – then drop it on unsuspecting investors when they finally move on to their next target.
The worst part? Shareholders who later buy into these manipulated rallies and fail to sell on time can suffer devastating losses.
This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a premium Motley Fool consulting service. We are motley! Challenging an investment thesis – even one of our own – helps us all to think critically about investing and make decisions that help us become smarter, happier, and richer.
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