Focus on the Forest With Lemonade Stock, Not the Trees

With the Street apparently focusing on the trees rather than the forest when it comes to Lemonade (NYSE:LMND), longer-term investors should buy shares of LMND stock on weakness.

LMND stock logo displayed on smartphone laying on top of computer keyboard.
Source: Stephanie L Sanchez / Shutterstock.com

More specifically, LMND stock has tumbled about 16% over the last month, apparently on fears of a small guidance miss and the negative impact of the  February winter storms in Texas.

However, Lemonade’s positive catalysts appear to be very much intact.

The Trees Preoccupying the Street

On March 9, Bank of America analyst Joshua Shanker started coverage of LMND stock with an underperform rating, the equivalent of a sell rating. The analyst contended that “Lemonade’s guidance of $372M-$378M in premium in-force seems aggressive.”

As evidence for his claim, Shanker stated that, “in-force premium growth declined in Q4” versus Q3, according to Seeking Alpha, while the insurer’s estimate of the premium increase for the current quarter was little changed versus Q2 of 2020. In the latter quarter, Lemonade’s premium generation was hurt by the onset of the Covid-19 pandemic, Shanker stated.

The analyst set a very bearish price target of $29 on LMND stock.

Also downbeat on Lemonade was William Blair’s Ralph Schackart. He wrote that, “The midpoint of in-force premium guidance exceeded [analysts’ average] consensus estimate on [a] full-year and quarterly basis … but the midpoints for gross earned premium and adjusted EBITDA guidance for both Q1 and the year fell short of the [mean] consensus estimates,” Seeking Alpha reported.

The analyst also cited last month’s storms in Texas as a reason to be bearish on LMND stock.

Assessing the Bears’ Points

Importantly, Lemonade’s Q4 results actually came in significantly above analysts’ average estimates, as it reported earnings per share of -60 cents, 4 cents above the mean outlook.

For a variety of reasons, companies are often conservative when it comes to their guidance. Therefore, I believe that investors should generally give more weight to Lemonade’s past results than to its guidance.

Also importantly, it may be difficult to compare Lemonade’s past financial results to its future data. That’s because, as I reported in my last column on LMND stock, the company decided “to outsource large portions of its claim obligations to reinsurers. In exchange, the company pays reinsurers a high proportion of its premiums.” That change started in Q3, but it may have accelerated in Q4 and Q1.

Additionally, by comparing quarters that fall during different times of the year, Shanker appears to be ignoring important seasonality factors.

And finally, the Texas snowstorms are likely a one-time event that should not negatively affect the longer-term outlook of LMND stock.

Lemonade’s Main Positive Catalysts Remain Intact

Overall, the insurer’s Q4 results show that it is continuing to grow rapidly while its move toward a positive bottom line is ongoing.

Oppenheimer analyst Jason Helfstein, who raised his rating on LMND stock to outperform in the wake of the company’s Q4 results and the stock’s subsequent retreat, reported that the percentage of home/condo owners was about 7% of its “total mix” at the end of Q4, up five percentage points in fiscal 2020. Of course, insurance for home and condo owners is far more lucrative than the company’s other main products — renters’ insurance, life insurance and pet health insurance.

Further, the analyst expects Lemonade to unveil auto insurance by Q3 of 2022, boosting its revenue by $500 million, at a minimum. He says that the company’s cross-selling strategy is succeeding and set a $110 price target on LMND stock.

And as Lemonade CEO Daniel Schreiber pointed out on the company’s Q4 earnings conference call, citing comparisons between last quarter and the same period a year earlier, “our in force premium [grew] by 87%, our adjusted gross profit by 86%, and losses per dollar of gross earned premium roughly halved.”

The Bottom Line on LMND Stock

Lemonade’s Q4 results show that the insurer’s “secret sauce” is still working. Meanwhile, the bears are focusing on the proverbial trees instead of the forest.

I am convinced that the current market capitalization of LMND stock is meaningfully below the company’s longer-term potential.

On the date of publication, Larry Ramer did not have (either directly or indirectly) any positions in the securities mentioned in this article. 

Larry Ramer has conducted research and written articles on U.S. stocks for 13 years. He has been employed by The Fly and Israel’s largest business newspaper, Globes. Larry began writing columns for InvestorPlace in 2015.  Among his highly successful, contrarian picks have been GE, solar stocks, and Snap. You can reach him on StockTwits at @larryramer. 


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