Short selling data can provide investors with powerful insights. Generally speaking, short sellers are well-informed, high-conviction traders. If they’re targeting a stock, it can pay to approach that security with caution.
In this report, we are going to highlight some interesting short selling activity at Lemonade Inc (LMND:US). Lemonade is a US insurance company that offers renters’ insurance, homeowners’ insurance, and pet insurance. It currently offers its services – which are powered by artificial intelligence – in the US, Germany, France, and the Netherlands. The company is listed on the New York Stock Exchange and has a market capitalization of $4.3 billion at present.
Lemonade Inc: Short Selling Activity
An analysis of short selling data on Lemonade reveals several red flags. The first is that short interest is very high right now. Our short selling data shows that, at present, 13.3 million Lemonade shares are on loan. Lemonade has a total of around 61.4 million shares in issue meaning that short interest is currently 21.7%. This tells us that many sophisticated investors expect the stock to fall.
The second is that the stock’s utilization rate is very high. Utilization is the number of loaned shares divided by the available shares in the securities lending market, expressed as a percentage. It is essentially a measure of demand for shares on the short side. Currently, Lemonade has a utilization rate of 90%. This is up from around 42% at the beginning of March. This indicates that demand for the shares from short sellers has increased significantly recently, which is concerning.
Muddy Waters Attack
On 13 May, short seller Muddy Waters wrote an ‘open letter’ to the CEO of Lemonade Inc, Dan Schreiber, criticizing the company’s data protection framework.
In the letter, Muddy Waters stated that, in the course of using Lemonade’s site to do fundamental business research, it accidentally discovered that Lemonade’s site contains a security flaw that potentially exposes its customers’ personal identifiable information (PII). The short seller said that the vulnerability was so ‘gaping’ that a number of search engines had indexed customer PII.
Source: Muddy Waters
In a tweet, Lemonade’s president Shai Wininger said that the bug is “not a vulnerability, it’s by design.” However, it seems that Muddy Waters doesn’t believe the company. It’s worth noting that a short time after the letter was made public, some of the indexed results stopped working.
We think $LMND is lying about the vulnerability, and this video shows it. As the video shows, the claim #Lemonade is making is analogous to someone being able to login into your Twitter account just by clicking on your Tweet. BS. cc: @shai_wininger https://t.co/Ivc6Y94DGL— MuddyWatersResearch (@muddywatersre) May 13, 2021
In light of the attack from Muddy Waters, we see the short selling activity here as bearish. Given the high level of short interest, we think caution is warranted towards Lemonade stock right now.