The past six months have been a windfall for Lemonade’s shareholders. The company’s stock price has jumped 65.6%, setting a new 52-week high of $60.50 per share. This run-up might have investors contemplating their next move.
Is now the time to buy Lemonade, or should you be careful about including it in your portfolio? Get the full breakdown from our expert analysts, it’s free.
Why Is Lemonade Not Exciting?
We’re happy investors have made money, but we don't have much confidence in Lemonade. Here are three reasons why there are better opportunities than LMND and a stock we'd rather own.
1. EPS Barely Budging
We track the long-term change in earnings per share (EPS) because it highlights whether a company’s growth is profitable.
Lemonade’s full-year EPS was flat over the last four years. This performance was underwhelming across the board.
2. Declining BVPS Reflects Erosion of Asset Value
In the insurance industry, book value per share (BVPS) provides a clear picture of shareholder value, as it represents the total equity backing a company’s insurance operations and growth initiatives.
To the detriment of investors, Lemonade’s BVPS declined at a 19.7% annual clip over the last two years.
3. Previous Growth Initiatives Have Lost Money
Return on equity, or ROE, represents the ultimate measure of an insurer's effectiveness, quantifying how well it transforms shareholder investments into profits. Over the long term, insurance companies with robust ROE metrics typically deliver superior shareholder returns through a balanced approach to capital management.
Over the last five years, Lemonade has averaged an ROE of negative 30.3%, a bad result not only in absolute terms but also relative to the majority of insurers putting up 20%+. It also shows that Lemonade has little to no competitive moat.
Final Judgment
Lemonade isn’t a terrible business, but it isn’t one of our picks. Following the recent rally, the stock trades at 9.6× forward P/B (or $60.50 per share). This valuation tells us it’s a bit of a market darling with a lot of good news priced in - you can find more timely opportunities elsewhere. Let us point you toward one of Charlie Munger’s all-time favorite businesses.
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