Why Lemonade Stock Wilted by Almost 9% on Wednesday
Key Points
The insurer's stock is no longer a buy, according to a pundit's latest update.
While he feels the company still has potential, a recent rally in the share price has left it fairly valued.
Lemonade (NYSE: LMND) stock was nearly as sour as its favorite fruit on Wednesday, at least as far as its stock was concerned. Shares of the insurer dived by nearly 9% during that trading session after an analyst at an influential investment bank downgraded his recommendation on the stock.
Time for a downgrade
Well before market open that day, Morgan Stanley's Bob Huang moved his Lemonade rating down one peg to equalweight (read: hold) from his preceding overweight (buy). He also set a price target of $75 per share.
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According to reports, while Huang feels that the company's momentum continues to be strong, the company requires a new catalyst to justify its current price levels. These have risen by around 50% over the past few weeks, the analyst pointed out.
For him, the development to watch will be how the next-generation insurer manages what he considers to be a "softening" auto insurance market. That's a challenge in and of itself, and will be something of a test to see how well it can cope.
Look past the price
I'd agree with Huang about Lemonade's positive momentum, particularly given the sweetened reinsurance program it recently announced. Yes, the shares look expensive, but the company has lately proved it can be quite the nimble and effective operator in an always-competitive field. I'm more positive on its potential for gains than the Morgan Stanley analyst; I'd even consider it a buy candidate.
Eric Volkman has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Lemonade. The Motley Fool has a disclosure policy.