Short Selling

Short Sellers Continue to Target Lemonade Inc Despite Share Price Fall

LEMONADE INC
(LMND:US)
12 months:
-78%
Activity:
Bearish
Pattern:
High short interest
News:
Q1 results
LEMONADE INC
(LMND:US)
12 months:
-78%
Activity:
Bearish
Pattern:
High short interest
News:
Q1 results

Short sellers are some of the smartest minds in the investment business. If they’re shorting a stock, it’s often a sign that there’s downside risk for the security.

In this report, we are going to take a look at the short interest data on Lemonade Inc (LMND:US). Lemonade is an American insurance company that offers renters, homeowners, car, pet, and life insurance. Currently, it has around 1.5 million customers across the US, Germany, France, and the Netherlands. The company is listed on the New York Stock Exchange and has a market cap of $1.2 billion at present.

Lemonade: Short Interest Data

We have covered Lemonade on several occasions this year. In January, we noted that 14.9 million shares were on loan (39% of the free float). Then, in April, we noted that 17.1 million shares were on loan (44% of the free float). Since these articles, Lemonade’s share price has declined significantly (approx. 32% from the January article and 21% from the April article) meaning that the short sellers will have made substantial gains from their short positions.

What’s interesting, however, is that the short sellers continue to bet against the stock. In fact, they’ve actually increased their short positions since our last article. Looking at our short selling data, we can see that at present, 20.05 million Lemonade shares are on loan, representing approximately 52.3% of the free float. Utilization – a measure of demand from short sellers – remains at 100%, indicating that demand on the short side is very high. Cost to borrow stock is now 30.4%, up from 21.0% in April and 1.8% in January. Clearly, the short sellers expect Lemonade stock to fall further.

Why Do Short Sellers Expect Lemonade Stock to Fall?

As for why the hedge funds are still short here, it probably comes down to valuation and lack of profitability.

Lemonade is not forecast to generate a profit this year or next. For 2022, Wall Street anticipates a net loss of $349 million. For 2023, it expects a net loss of $355 million. Companies with no profitability in sight are very much out of favor right now.

Meanwhile, the valuation remains relatively high. Analysts expect Lemonade to generate sales of $213 million this year. That puts the price-to-sales ratio at about 5.6. It’s worth noting that last quarter, the company provided sales guidance below analysts’ forecasts.

Another issue here is the company’s gross loss ratio. This is the ratio of losses and loss adjustment expense to gross earned premium. In the last quarter, the gross loss ratio was 90%, up from 72% two years earlier. This is high, and it’s going to impact the company’s ability to generate a profit.

Whatever it is the short sellers are looking at here, we think caution is warranted towards the stock at present, given the large number of shares on loan.

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