emerging insurance stocks lemonade (LMND -2.99%) up 14.2% in trading during the short holiday week last week. There was no fresh news to cause the company to rise, but measly growth stocks generally rose after a particularly brutal June.
The positive start to July was a bit of a relief for Lemonade shareholders. Stock is down 49% in 2022 so far while is -18% negative S&P500,
Speaking of an impending (or possibly already existing) economic downturn, growth stocks were in rally mode last week. To control inflation, the US Federal Reserve is raising interest rates to cool the economy. Preliminary data shows that consumer spending habits are being hit, travel is slowing, and energy costs are falling. If inflation eases, the Fed can slow the pace of rate hikes.
But what about stocks? Well, a recession isn’t exactly good for trading, but higher interest rates tend to reduce the present value of riskier assets like stocks. If the Fed is almost done raising rates, it could be less of a headwind for Lemonade stock.
Aside from the stock price, Lemonade is still at high risk. The upcoming takeover of the auto insurance company metropolis (MILE 0.00%) did not close Q2 as initially expected, possibly due to ongoing inquiries from insurance regulators. And even if the deal goes according to plan, Lemonade and Metromile are two companies that are losing money. Many question marks remain.
For now, it remains a high-risk and potentially rewarding investment. Lemonade is still growing rapidly, and expanding into auto insurance with Metromile could help it continue its expansion momentum. But it has yet to be proven that its artificial intelligence algorithms will give it an edge over its legacy insurer competition when it comes to policy writing. With time and scope, that may change, but it’s a race against the clock — or more specifically, a race against a fast-burning balance sheet. Combined, Lemonade and MetroMile had a little over $1 billion in cash and short-term investments at the end of March, but it’ll erode that cushion within a few years if they lose money at this rate. are in .
Given these risks, you should keep a supply of soda pop. very Small percentage of your total portfolio if you choose to hold it.
Lemonade features Nicolas Rosolillo’s contribution. Your customers can own the shares mentioned. The Motley Fool positions and recommends Lemonade. The Motley Fool has a disclosure policy.