If you regularly invest in stocks, you've probably heard the saying "sell in May and go away." It came about because the S&P 500 typically delivers weaker returns in the six-month period between May and October, compared to the six-month period between November and April.
Seasonality is likely the culprit. There is less trading activity in the warmer spring and summer months because Wall Street bankers and fund managers take time off, much like everybody else. But according to the Corporate Finance Institute, the S&P 500 averages a return of 2% between May and October each year, dating back to 1945. It's less than the average gain of 6.7% for the rest of the year, but it's still a positive return.
Therefore, selling in May would result in a worse return over the long run than staying in the market year-round. That's why investors might want to buy stocks this month, especially since the S&P 500 is trading at an 8% discount to its all-time high right now due to simmering global trade tensions.
Lemonade(NYSE: LMND) is one stock to consider. The company continues to deliver strong financial results driven by its artificial intelligence (AI)-powered insurance business, and it plans to grow its business tenfold in the coming years.
Image source: Getty Images.
Transforming the insurance industry with AI
Dealing with traditional insurance companies can be frustrating. The claims process can involve several phone calls and lengthy waiting periods, adding stress to an already difficult situation. Lemonade is changing that by placing AI at the center of the customer experience. It developed two chatbots: Maya, which can write quotes in under 90 seconds via the company's website, and Jim, which can process claims in under three minutes without human intervention. Jim even set a new record in 2023 when it settled a genuine claim in just two seconds.
Lemonade currently offers renters, homeowners, life, pet, and car insurance, and its AI-powered strategy appears to be resonating because the company had a record 2.5 million customers at the end of the first quarter of 2025 (ended March 31), a 21% increase from the year-ago period.
But Lemonade is also using AI in other ways behind the scenes. To calculate the most accurate premium, its lifetime value (LTV) models predict how likely each customer is to make a claim, switch insurers, and buy multiple policies. Lemonade's AI models also help to identify underperforming products and/or geographic markets, so the company can quickly pivot its marketing spending to maximize revenue.
Lemonade increased its revenue guidance for 2025
Lemonade's in-force premium (IFP) topped $1 billion for the first time during the first quarter. Its year-over-year growth accelerated for the sixth consecutive quarter, coming in at 27%. IFP is the value of premiums from all outstanding policies, so it's one of the most important measures of success for an insurance company.
Moreover, Lemonade's trailing 12-month gross loss ratio continued to decline on a year-over-year basis during Q1, coming in at 73%. This represents the proportion of premiums the company paid out as claims. Management believes 75% is the threshold for a thriving insurance business, and the lower it is, the more money Lemonade pockets as revenue and then earnings (profit).
After deducting the value of premiums that Lemonade cedes to other insurers to mitigate risk, its Q1 revenue came in at a record high of $151.2 million. That was up 27% compared to the year-ago period, and it comfortably beat the high end of management's forecast of $145 million. On the back of the strong result, the company increased its guidance for the 2025 full year -- it now expects to deliver $662 million in total revenue (at the midpoint of the range), compared to $556 million previously.
But it wasn't all good news in Q1. Lemonade's losses on an adjusted earnings before interest, tax, depreciation, and amortization (EBITDA) basis jumped 38% to $47 million, mainly because of the devastating wildfires in California, which dealt a $22 million hit to the bottom line during the quarter. For the most part, Lemonade's losses have trended lower over the last couple of years, which is great news. But the insurance industry can be volatile, so the company hedges its risk by ceding some of its premiums to other providers.
Investors shouldn't be immediately concerned about the higher Q1 loss, especially since management still thinks Lemonade can achieve profitability by the end of 2026 on an adjusted EBITDA basis.
Why Lemonade stock is a buy now
It took Lemonade around a decade to reach $1 billion in IFP. Now, management thinks it could achieve $10 billion in IFP over the next decade or so, highlighting how quickly the business is scaling.
Investors have an opportunity to buy Lemonade stock at an attractive valuation today because it remains 81% below its all-time high, set during the tech frenzy in 2021. It was heavily overvalued back then, but its sharp decline, combined with the company's consistent revenue growth over the last few years, has pushed its price-to-sales (P/S) ratio down to just 4.1.
That's near the cheapest level since Lemonade went public, and it's a fraction of where it was just a few years ago:
The path to $10 billion in IFP won't be perfectly smooth because Lemonade is still rapidly expanding. It insures customers in the U.S., in addition to the United Kingdom and three European countries, but it plans to expand into dozens of other markets. Every time Lemonade enters a new country or launches a new product, its gross loss ratio will face upward pressure because it takes time to achieve scale.
That can flow through to the company's revenue and earnings, so investors need to take a very long-term view (of five years or more) to smooth out the noise. But for those who are patient, Lemonade has the potential to deliver great returns on the road to $10 billion in IFP.
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Anthony Di Pizio has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Lemonade. The Motley Fool has a disclosure policy.
