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Why Rocket Companies Stock Crashed Today

After soaring on Tuesday, the mortgage giant's shares came crashing back down to earth.
What happened

Rocket Companies (NYSE:RKT) plunged 33% on Wednesday after analysts warned that the stock had come too far, too fast. 

So what

Rocket's share price surged more than 70% on Tuesday in what appeared to be another Reddit-fueled short squeeze. Yet late last night, RBC Capital analyst Daniel Perlin cut his rating on Rocket's stock from outperform to sector perform and reiterated his $30 price forecast. That was 28% below where Rocket's stock closed yesterday. 

A downwardly sloping stock chart.

Shares of Rocket Companies lost a third of their value on Wednesday. Image source: Getty Images.

Perlin argued that the risk-to-reward potential for investors was "now more balanced, if not skewed to the downside" following the stock's rapid ascent. 

Analysts at JPMorgan went even further. "In light of the sharp rise in share prices, we believe fundamental investors should take profits," JPMorgan strategist Richard Shane said on Wednesday morning. 

Many traders apparently took these analysts' comments as a reason to sell their shares today.

Now what

Many individual investors are taking part in coordinated buying campaigns on Reddit and other social media platforms. This is a dangerous game -- one that often ends in disaster.

These crowdsourced buying frenzies can certainly help to drive a stock's price sharply higher -- for a while -- as we've seen with GameStop and now Rocket Companies. But many of these traders will hype a stock to pump up its price -- and then dump it on unsuspecting investors when they eventually move on to their next target.

The worst part? Shareholders who buy later in these manipulated rallies and don't sell in time can suffer devastating losses.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.

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