Why Are Short Sellers Betting Against Lemonade (LMND) Despite Impressive Growth Metrics?
We recently published a list of 10 Worst Small Cap AI Stocks To Buy According to Short Sellers. In this article, we are going to take a look at where Lemonade (NYSE:LMND) stands against other worst small cap AI stocks.
The September Interest Rate Cut
Analysts have been anticipating interest rate cuts for a while now, with bets on either a 25- or a 50-basis point reduction. Concerns about potential economic instability and the impact of these cuts on net interest income for banks added complexity to the market outlook. However, the situation was sorted when the Fed cut interest rates by 50 basis points on September 18 this week, marking its first easing of monetary policy since the pandemic began.
This reduction was prompted by growing concerns about the labor market’s health. Following this decision, the Fed’s benchmark rate now stands at a range of 4.75% to 5.0%.
The Fed’s Summary of Economic Projections indicates that policymakers anticipate further cuts, with expectations of a half-point reduction by the end of this year, an additional full percentage point in 2025, and another half-point cut in 2026, ultimately targeting a range of 2.75% to 3.00%. Fed Chairman Jerome Powell stated that the projected rate cuts are not urgent and that the timing for easing is appropriate.
As political dynamics unfold ahead of the presidential elections in November, Powell emphasized that monetary policy decisions are based solely on data and economic outlooks rather than political considerations.
While a lot of analysts suggested that a 50 basis-point rate cut could be an over-exaggeration, Erika Najarian, UBS senior equity research analyst, just earlier this week, mentioned that small- and mid-cap stocks could benefit from a 50 basis-point cut. We talked about this in another one of our articles, 16 Best Mid Cap Growth Stocks To Buy Now, here’s an excerpt from it:
“Najarian attributes the recent underperformance of financial stocks to market concerns about the implications of potential rate cuts for economic stability, leading investors to question a less favorable economic outlook. She believes some anticipated cuts may already be reflected in money center bank stock prices due to their strong year-to-date performance. A 50 basis point cut could especially benefit mid-cap stocks affected by commercial real estate issues.
She explains that a 50 basis point cut would significantly impact net interest income. Money center banks benefit more from rising rates, while mid-caps are liability-sensitive and may see deposits repriced faster, favoring them if rates are cut aggressively…. She points out that banks must choose between cutting rates to remain competitive or maintaining volume, complicating forecasts for net interest income.”
Right after the Fed’s announcement, Mark Avallone, president at Potomac Wealth Advisors, discussed his reaction to the Fed’s 50 basis-point rate cut, considering the recent financial market fluctuations sparked by this decision. The move led to a volatile trading session, with the Dow Jones Industrial Average initially reaching all-time highs before briefly turning negative. By the end of the session, the Dow was up 188 points, while the S&P 500 rose by half a percent and the NASDAQ climbed approximately 0.8%.
Mark Avallone expressed surprise at the Fed’s decision but emphasized that investors shouldn’t make impulsive decisions, but rather utilize potential opportunities in small and mid-cap stocks, which he believes will benefit from a lower interest rate environment. He noted that these stocks are currently valued at about 50% of the forward price-to-earnings ratio compared to large-cap stocks, making them an attractive investment option.
Avallone warned investors to be cautious with traditional banks, especially mid-sized and large ones, based on his experience at Bank of America. He believes that the recent changes in loan pricing after the Fed’s rate cut would hurt banks’ overall revenue and income from interest. Since deposit rates are likely to stay high due to competition from non-bank financial companies and money market funds offering attractive rates above 5%, traditional banks might find it hard to stay profitable.
He suggested that it may be too late for significant moves in fixed-income investments, as many investors have already lengthened their bond durations. He recommended pausing further adjustments until it’s clear whether the rate cut is due to an economic slowdown or a preemptive action.
So, while the Fed’s interest rate cut has created uncertainty in the markets, Avallone’s analysis highlights specific sectors and strategies that could offer potential growth amid these challenges. With that context, we’re bringing you a list of the 10 worst small-cap AI stocks to buy according to short sellers to short sellers.
Why are we interested in the stocks that hedge funds pile into? The reason is simple: our research has shown that we can outperform the market by imitating the top stock picks of the best hedge funds. Our quarterly newsletter’s strategy selects 14 small-cap and large-cap stocks every quarter and has returned 275% since May 2014, beating its benchmark by 150 percentage points (see more details here).
An elderly couple with their arms around each other, holding a frame of life insurance.
Lemonade Inc. (NYSE:LMND)
Short % of Shares Outstanding As of August 30: 23.83%
Market Capitalization as of September 14: $1.29 billion
Number of Hedge Fund Holders: 17
Lemonade (NYSE:LMND) is a digital insurance company that uses AI to streamline the insurance process, by offering a variety of insurance products in many countries for homeowners, renters, pets, and term life, to make insurance more accessible, affordable, and transparent. It has over 2 million customers.
In the second quarter of this year, the company made $122 million in revenue, up 16.63% year-over-year. In-force premium grew 22% to $839 million, while customer count increased by 14% to 2.2 million. Premium per customer increased 8% as compared to last year to $387, driven primarily by rate increases.
Despite increased catastrophic event losses, the company’s loss ratio improved to 79%. Lemonade (NYSE:LMND) achieved this by focusing on lower-risk products like pet and renters insurance, expanding to Europe, and strategically placing home insurance. It has launched homeowners insurance in the UK and France and continues to sell in the US where its AI predicts favorable long-term value. It’s also placing some home premiums with third parties in certain regions.
The company is investing heavily in AI-powered automation to streamline operations and improve profitability. It aims to optimize over 100 business processes, with early cost savings expected within 18 months. Its GenAI can handle 30% of customer interactions without human intervention. Lemonade (NYSE:LMND) is planning to expand into auto insurance within the next 18 months as well.
It’s using AI throughout its operations, from customer service to internal processes. The company plans to capitalize on the growing demand for digital, personalized insurance products through AI and is expected to position itself as a leader in the sector.
Overall, LMND ranks 1st on our list of 10 Worst Small Cap AI Stocks To Buy According to Short Sellers. While we acknowledge the potential of LMND as an investment, our conviction lies in the belief that AI stocks hold great promise for delivering high returns and doing so within a shorter timeframe. If you are looking for an AI stock that is more promising than LMND but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
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Disclosure: None. This article is originally published at Insider Monkey.