For those fond of making lemonade or the like in the summer, you know firsthand how easy it is to get the mix wrong. Too much sugar and it's like drinking syrup, too much water and you might as well have not even bothered with the mix and sugar to begin with. Lemonade (NYSE:LMND), the online insurance operation, has discovered the consequences of thinning its mix too far down recently as it announced plans to roll out a new secondary share offering.
A Good Day For It
On the surface, it was a fine day for Lemonade to roll out new stock. Especially true given how trading was going on Monday; not only were all three major stock market indexes down by noon, but Lemonade was actually up. Up in a big way, too; just ahead of the noon hour the stock hit an all-time record high, having gained 14% before lunch.
When investors tried to ferret out a cause for this, they found shockingly little to support it; there were no major news issues or the like that would cause an uptick in sentiment, so many just chalked it up to Lemonade's overall status, and the hefty run-up it had seen since early November, when the stock issued.
Thus the company announced plans to offer three million shares of common stock for sale, including about 1.5 million from “selling stockholders” like early investors. Lemonade subsequently discovered that that may not have been a good plan, as the stock price dropped about 7% in after-hours trading. It has recovered a bit since, but it started the day well off yesterday's close. Interestingly, reports note that Lemonade itself wouldn't profit from this additional issue.
Nursing the Lemonade
Our latest research, meanwhile, continues to paint Lemonade as a “hold” overall. Little seems to have changed from our last look at Lemonade almost two weeks ago, as the company continues to sit at two “sell” ratings, four “hold” and two “buy.” Proportionally, that ratio has held for the last three months, though three months ago there was only one “sell” and one “buy” rating in the mix with the four “hold” ratings.
The price target has made notable recovery from last month, though not from its original release date about three months ago. The company went from $86 to $77 to its current level of $83.80.
Lemonade Going Sour?
Some may find it hard to believe that a stock can go from record highs to a 7% loss in the same day, especially on so little news, but here it makes a kind of sense. We're talking about a stock that hasn't been publicly available to buy for even half a year yet, so volatility is likely to be part of the package. In this case, a fairly substantial part of the package.
With the current analyst consensus suggesting not going in further on Lemonade, it's worth checking into why that's so. There's a good reason, particularly for the risk-averse; this stock is still comparatively new and it's likely to have some wild swings as it finds its true level. Sitting things out for a while and letting the company shake itself out might not be a bad play.
However, there's something to be said for buying the dip on this one, as the company itself is pretty sound. First, it deals in insurance; that's something most of us want, even if sometimes we don't see much of a need for it. Most of us will probably never have a car accident or a house fire, so sometimes it can seem like we're paying into nothing. Yet we realize the possibility of such events, so we pay instead for peace of mind, that we're protected if such a thing should happen.
Second, it's made great strides in its market; it's already reached the one millionth customer mark. By comparison, it took State Farm 22 years to pull off a similar feat. Lemonade's use of advanced technology, including artificial intelligence, is giving it a real boost in the sector and bringing in a slate of new insurance customers.
Thus, while investors may not be particularly pleased about the idea of the stock getting watered down with new releases, the company is still pretty sound at its base. It's providing access to better insurance and making it easier to deal with overall. For a product that most of us buy but never use, that's a great leap forward, and it's also the kind of thing that should make Lemonade's product line attractive long after the initial furor around its stock has died down. Buying into this particular dip, therefore, could be an idea that pays off down the line.
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