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Here's Why Lemonade Stock Was Soaring on Wednesday

By Matthew Frankel, CFP® - Updated Jan 27, 2021 at 10:59AM

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The wave of short squeezes is having ripple effects on the insurance tech company.

What happened

The stock market was having a rough day on Wednesday, with all major market indexes well into the red at 11 a.m. EST. But the short-selling action we've seen in names like GameStop (GME 0.92%) and AMC Entertainment Holdings (AMC -0.15%) in recent days has spiked to another level, sending some of the market's most heavily shorted stocks spiking higher.

Insurance tech company Lemonade (LMND 2.57%) is one of the businesses that appear to be getting some ripple effects from the wave of short covering, with shares spiking higher by about 17% on the day.

Jar of lemonade.

Image source: Getty Images.

So what

While short interest in Lemonade isn't quite at the extreme levels of GameStop or AMC Entertainment, there are quite a few investors betting against the company. Lemonade's short interest of 22% as of Dec. 31, 2020, implies that more than one-fifth of the shares available for trading (the float) are sold short, a relatively high level compared to most other stocks. For comparison, fellow insurance stocks MetLife and Aflac have short interest of 1.5% and 1%, respectively.

Now what

Not only do short squeezes tend to make affected stocks spike higher, but they also create tremendous volatility. It's likely that Lemonade's performance will be significantly different by the time you're reading this. For this reason, short squeezes are a good time for most investors to do nothing. This doesn't have anything to do with Lemonade's business, its market opportunity, or other long-term reasons to own the stock.

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Stocks Mentioned

Lemonade, Inc. Stock Quote
Lemonade, Inc.
$18.73 (2.57%) $0.47
GameStop Corp. Stock Quote
GameStop Corp.
$123.42 (0.92%) $1.12
AMC Entertainment Holdings, Inc. Stock Quote
AMC Entertainment Holdings, Inc.
$13.53 (-0.15%) $0.02

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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