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Bear of the Day: Lemonade (LMND)

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Jeremy Mullin
·4 min read
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Lemonade (LMND) is a Zacks Rank #5 (Strong Sell) that primarily offers homeowners and renters insurance in the U.S. and Europe. The company had its IPO back in July of last year and the stock has since more than tripled from its debut price.

The stock now faces valuation questions and attacks from short sellers on whether the business is worth anything close to its current valuations.

About the Company

Lemonade is headquartered in New York, NY and employs 459 people. The company was founded in 2015 and its insurance products cover stolen or damaged property and personal liability.

LMND is valued at $9 billion and has a an off the chart valuation. The company holds a Zacks Style Score of “F” in both Value, but “A” in momentum.

Q3 Earnings

The company reported earnings in November, beating by 17%. The quarter was solid, with a revenue beat and a Q4 guide higher. They also raised their FY20 outlook and raised their gross earned premium. Gross profit margin came in at 52% v 21% just a year ago.  

While the quarter was pretty good, the stocks reaction was even more fantastic. Since earnings, the stock had eight straight up weeks, finally marking a high of $188.30 before pulling back below $150. In total since EPS, the stock shot up 200% before a stock offering cooled the momentum.

Offering

Last week the company filed to offer 4.8M shares of stock at $165/share. This is 8% of the firm’s shares outstanding that will be used for general corporate purposes.

The move stopped the momentum and the stock had its first negative week in two months. But it wasn’t just the offering that caused selling, as multiple bears came out in favor of the short side.

Citron and Others Attack

Friendly Bear came out Dec 31 against the stock saying the following:

"Lemonade is an egregious stock promotion disguised as a social impact company – the company is making a complete farce of the ESG investment movement. Today’s press release establishes that growth is falling off a cliff – based on the ~1MM active customer disclosure, the company had one of its weakest net add quarters since inception." 

Notorious short seller Citron had even more impact on the stock as they called for the stock to go “right back to $100”. Citron also said “The FTC and SEC should look into Lemonade”

Estimates

Perhaps more concerning than the short calls are the lack of rising estimates for such growth and momentum that is in the stock. Over the last 30 days, numbers have stagnated over all time frames. So despite the FY20 raise, analysts don’t seem to be excited, despite investors appetite.

Technical Take

The stock has gone parabolic so investors need to be careful. There is a high probability that we see a test of the 21-day MA at $133, If that breaks look for the 50-day at $98. The 61.8% Fibonacci retracement level is $100 and would be a spot to look for buyers.

In Summary

A parabolic stock, and offering and short sellers will create a lot of volatility for Lemonade going forward. Investors should be cautious and stay away if they can’t stomach the big moves. For those interested in buying the stock if the shorts prediction come true, look to the moving averages for support



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