What happened

Shares of insurance-tech company Lemonade (LMND -0.87%) were up 20.9% in June, according to data provided by S&P Global Market Intelligence. It's important to note that the stock is still down about 12% year to date as of this writing and down more than 40% from its 52-week high. However, out-of-favor growth stocks like this were generally regaining bullish investors during June. Furthermore, Lemonade might have had another counterintuitive catalyst helping it march higher. 

So what

In May, a firm called Muddy Waters published an open letter to Lemonade's management, explaining how the insurance-tech platform had major security vulnerabilities. In times past, a report like this might have struck fear in investors' hearts and caused the stock to fall as a result. But in 2021, reports from short-sellers have frequently served to galvanize the resolve of bulls. Accordingly, we have seen short interest steadily declining in Lemonade stock. Yahoo! Finance says there were almost 10.5 million shares sold short as of May 14. By June 15, this had dropped to about 7.5 million.

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Image source: Getty Images.

Lemonade management later responded to Muddy Waters by saying the supposed vulnerability wasn't faulty security but rather a feature. But this exchange between short-seller and management came in May.

In June, the only newsworthy event was CFO Tim Bixby's presentation at the Morgan Stanley Sustainable Futures Conference. However, the presentation was mostly just an overview of what makes Lemonade unique in the insurance space, and there wasn't anything that explained the stock's 20% move higher.

Now what

To reiterate, Lemonade's stock didn't go up in June because of something positive with the underlying business fundamentals. But that's where long-term investors should be focused nonetheless. The company struggled in the first quarter of 2021, as the Texas freeze caused it to receive a year's worth of insurance claims in just a few days. Around 20% of its business comes from Texas, meaning it has concentration risk in this specific geography. For what it's worth, it also has concentration risk with around 25% of its business coming from California. 

To keep it from being disproportionately challenged by single catastrophic events like the Texas freeze, Lemonade just needs to keep growing. The company ended the first quarter with almost 1.1 million customers, up 50% year over year. And management said roughly half of new business comes from new products like pet insurance. Growth in areas like this will help stabilize this business over time and will allow shareholders to better evaluate the company's progress when it comes to profitability. This is a better area to focus on than the amount of short interest the stock has.