Short selling data can be very effective from a risk management perspective. Due to the risks associated with short selling, short sellers tend to do their research. If they’re shorting a stock, there’s usually a good reason they are doing so.
In this report, we are going to analyze the short selling data on Lemonade Inc (LMND:US). Lemonade is an American insurance company that offers renters, homeowners, car, pet, and life insurance. Operating in the US, Germany, France, and the Netherlands, it currently has over 1 million customers. It is listed on the New York Stock Exchange and has a market capitalization of $1.48 billion at present.
Lemonade Inc: Short Selling Activity
Looking at the short selling data on Lemonade today, we see a couple of things that concern us.
One is that short interest is very high. At present, 17.1 million shares are on loan. That represents roughly 43.96% of the free float.
Another is that short interest has been climbing. The last time we covered Lemonade stock, in late January, 14.9 million shares were on loan. Since then, the figure has risen by about 15%. This, and the fact that utilization has jumped from 92% to 100%, tells us that short sellers have been ramping up their short bets here recently.
Why Short Sellers Are Targeting Lemonade
As for why short sellers are targeting Lemonade, it could be down to the company’s gross loss ratio.
In February, the company told investors that its gross loss ratio had risen to 96% from 73% a year earlier on the back of its expansion into new areas of the market. Investors were not impressed. With the gross loss ratio at 96%, the company is going to struggle to generate profits. Currently, Wall Street expects the firm to generate a net loss of $351 million this year.
Alternatively, it could be related to disappointing growth forecasts. In its full-year results, Lemonade forecast revenue of $202 million to $205 million for FY2022. Analysts had been expecting $219 million.
Of course, it could simply be related to the stock’s valuation. With a market cap of around $1.7 billion currently, Lemonade has a forward-looking price-to-sales ratio of about 8.4. That’s relatively high.
Given the high level of short interest here, we think caution is warranted towards the stock right now. Clearly, the short sellers see further downside.