The U.S. equity market continued its bull rally throughout July and early August, despite the Federal Reserve resuming interest rate hikes. Major indexes such as the S&P 500, Nasdaq Composite, and Dow Jones Industrial Average have posted gains of 16%, 30%, and 6%, respectively, so far this year.

Much of this market optimism can be attributed to the exceptional resilience of the U.S. economy, despite tough macros. Investors are feeling increasingly confident in the Federal Reserve's ability to control inflation without causing a recession.

In such a bullish environment, it makes sense for retail investors to pick up small positions in fundamentally strong growth stocks. Here's why Tesla (TSLA -1.11%) and Lemonade (LMND 1.64%) can prove to be good picks in the current environment.

1. Tesla

Cathie Wood's Ark Invest is extremely optimistic about electric vehicle (EV) industry pioneer Tesla and estimates a target price of $2,000 by 2027, implying an upside potential of over 700%. While the target price seems unrealistic, there is still a lot to like in Tesla -- especially since the stock has now corrected following a mixed second quarter (ended June 30, 2023) earnings result.

For several years, Tesla posted impressive gross margins thanks to cutting-edge product engineering capabilities and superior manufacturing processes in its gigafactories. However, as competition intensified, the company opted to slash car prices in a bid to boost demand. This strategy helped Tesla sell a large number of cars, as is evident from the company's better-than-expected top-line and bottom-line performance in Q2. Unlike other EV players, which are mostly loss-making or have very low margins, Tesla's high margins have given the company flexibility to enter a price war with competitors.

As more of the company's electric vehicles enter the market, Tesla plans to earn a significant portion of its revenue from the recurring subscriptions for its fully autonomous self-driving (FSD) technology. Currently, customers have already used autonomous self-driving technology for real-world driving in beta mode for over 150 million miles. Tesla also plans to license its FSD technology to other automakers, opening up new revenue streams.

Tesla also rapidly expanded its supercharger network -- over 50,000 connectors at over 5,000 locations. Plus, the company is also planning to open up a part of its Supercharger network to non-Tesla electric vehicles by the end of 2024. Goldman Sachs analyst Mark Delaney expects the annual incremental revenue from these moves to be $1 billion to $3 billion in the next few years. Morgan Stanley analyst Adam Jonas has also valued this supercharger network at $100 billion in case Tesla starts producing and storing solar energy needed to power these chargers.

Tesla is currently trading at 72 times trailing 12-month earnings, far more than the median automotive industry valuation of 17. However, given its future growth potential, retail investors can consider buying a small position in this stock in August 2023.

2. Lemonade

Insurance technology company Lemonade differentiates itself from the competition by extensively using data, behavioral economics, machine learning, and artificial intelligence (AI) for tasks such as pricing and sale of insurance policies, settling claims, and customer service -- all in a matter of a few minutes. Lemonade also plans to leverage generative AI to improve over 100 business processes and create cost savings over the next 18 months.

Lemonade focuses on providing various types of low-cost coverage, including renter's, car, life, and homeowners insurance, to younger tech-savvy customers. By targeting these customers at a younger age, the company expects to cross-sell and upsell policies catering to the various needs across their life cycles. Further, to reduce the probability of abuse or fraud, the company also gives a significant portion of the unclaimed premiums to charities.

Lemonade's recent financials have been mixed. In Q2, the company reported a 21% year-over-year expansion in customer base to 1.9 million, while premium per customer rose by 24% year over year to $360.  The company's loss ratio (paid insurance claims and adjustment expenses as a percentage of total earned premiums), however, declined by 600 basis points year over year to 94%, mainly due to catastrophic losses (hurricanes, wildfires, and convective storms).

JMP Securities analyst Matthew Carletti expects Lemonade's share prices to soar 160% in the next 12 to 18 months to reach $40. This target seems quite achievable since Lemonade is currently trading at a price-to-sales ratio of 2.9, which is close to its historically low valuation levels. While the company is not yet profitable, it is making strides in the right direction, considering that the gross loss ratio (excluding catastrophes) was in the low 70s. Hence, there remains a high chance of significant multiple expansion in the coming months.

Given this backdrop, it makes sense to pick up at least a small position in this innovative digital-only insurance provider.

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