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Why rocket companies crashed today

What happened

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

So what

Rocket’s share price rose more than 70% on Tuesday in what appeared to be another Reddit-driven short press. Late last night, RBC Capital analyst Daniel Perlin cut his rating on Rockets ‘stock from better than sector performance and reiterated his price forecast of $ 30. It was 28% below where Rockets’ shares closed yesterday.

A downward sloping stock chart.

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

Perlin argued that the risk of rewarding potential for investors was “now more balanced, if not skewed downward” after the stock’s rapid rise.

Analysts at JPMorgan went even further. “Given the sharp rise in stock prices, we believe fundamental investors should take profits,” JPMorgan strategist Richard Shane said Wednesday morning.

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

What now

Many individual investors participate in coordinated buying campaigns on Reddit and other social media platforms. This is a dangerous game – which often ends in disaster.

These crowdsourced buying habits can certainly help drive a stock price sharply higher – for a while – as we have seen with GameStop and now Rocket Companies. But many of these traders will blow up 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 collections and do not sell on time may suffer devastating losses.

This article represents the opinion of the author, who may disagree with the “official” recommendation position for a Motley Fool premium advisory service. We are motley! Questioning an investment dissertation – 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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