Lemonade (NYSE:LMND) was once a red-hot IPO stock but has been laid low by the bear market ravaging growth stocks. However, the New York-based property and casualty company just saw its share price score a powerful rally off the lows. The eye-popping percentage gain has bottom fishers circling and old bulls wondering if it’s time to return to a stock that knows how to fly. I’m offering two reasons to pull the trigger and two reasons to steer clear.
2 Reasons to Buy LMND Stock
The first bullish argument is that Lemonade shares look more bullish than at any time over the past six months. In just seven sessions, LMND stock has soared 74%. Along the way, it broke two prior pivot highs and cleared the 20-day moving average.
This wasn’t just another tired oversold bounce to see the stage for an easy smackdown. It was a statistically significant and consistent rebound born of short covering and institutional accumulation. The higher volume seen along the way adds legitimacy to the bottoming bid, giving it better odds of sticking than any rally since last June.
We even succeeded in closing above the 50-day moving average Wednesday. While not a convincing close, the fact that we’re even able to touch the high side of this trend-following indicator is a change in character. Before this week, we hadn’t even sniffed it for five months.
So, yes, the technical posture of LMND stock is looking up. However, even bulls would be wise to watch for a lower-risk entry than piling in after such a significant jump. A retreat from here could set up a potential higher pivot low and more definitive bottoming pattern.
The second reason for optimism is the giant reversal we saw in the Nasdaq. I don’t think it’s a stretch to tie the rebound to a general sentiment shift around growth stocks. While the entire space has much work yet to do before turning their weekly downtrends, last week’s market resurrection certainly improves the backdrop.
For its part, the Nasdaq blasted through old resistance and the falling 50-day moving average. The market was pleased by the outcome of the Federal Reserve meeting, and we’ve seen a wave of buying in the aftermath.
2 Reasons to Stay Away
With the daily downtrend in the indexes now dead, it’s one less thing for LMND stock to worry about. Were that all I had to say on the matter, I’d pitch a bullish trade idea and move along. But, there are two arguments that you may find persuasive enough to avoid Lemonade altogether.
Salivate over the 74% rip-roaring run LMND stock just saw all you want. But remember, it’s still 85% off its highs, and at last week’s low, the drawdown was 91%. Do you know how many times a stock has to get cut in half to fall that far? Not once. Not twice. Not even three times. Four. Four times! Good, fundamentally healthy companies don’t do that.
The magnitude of the destruction says something (loud and clear, I might add) about just how much concern the Street has over the company’s balance sheet and prospects.
But here’s another thing. The vicious decline leaves a mountain of overhead supply that means the recovery, if it persists, will likely be a tough slog. The weekly trend remains atrocious, and as epic as last week’s rally was, it didn’t even dent the long-term descent.
The second reason is related to the first. There are far better choices if you want to shop beaten-down growth stocks. Remember, it’s not just unprofitable IPOs, SPACs, and otherwise questionable companies that have been taken to the woodshed.
Meta Platforms (NASDAQ:FB), Block (NYSE:SQ), Salesforce.com (NYSE:CRM), Advanced Micro Devices (NASDAQ:AMD), and many other more fundamentally sound and profitable companies have been brought low. I can make a far more compelling case for dumpster diving in them than LMND stock.
The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines. On the date of publication, Tyler Craig was long AMD.
