2023 began on a note of confidence, with investors moving back into growth stocks and the market on the rise. But even buoyed by that confidence, it's been a challenging year, with bank implosions, stubborn inflation, and more. As we move into the last month of the year, the economy is demonstrating resilience and the market is once again rallying. The S&P 500 is up nearly 19% since the start of 2023, edging ever closer to a new bull market.
When the bull market does return, the stock bargain bin will begin to empty out. The best time to buy stocks is before the market begins to take off again, which is why now is a great time to buy. But not every stock is a candidate for a bargain. That status is for stocks that have compelling growth potential combined with an attractive valuation. Lemonade (LMND 4.19%) and Redfin (RDFN -1.48%) fit the bill, and they could post dramatic gains in the next bull market.
1. Lemonade: The AI edge in insurance
Lemonade is an unconventional insurance company with an artificial intelligence (AI) infrastructure that gives it a healthy competitive edge over legacy insurers. Traditional insurance companies are certainly moving over to using AI and developing improved technology to compete with young upstarts like Lemonade, but investors shouldn't ignore the challenges traditional insurers face in making the change to match what Lemonade is already doing well.
Lemonade's third-quarter results illustrated its strengths with reports of $719 million in premiums (up 18% year over year), a 12% increase in customer count to nearly 2 million, and a 55% year-over-year increase in revenue.
What older companies have ahead of Lemonade is profits. Lemonade is getting closer there, but it's taking longer than some investors have patience for.
Image source: Lemonade. Note: All figures in $ millions. GEP = Gross earned premiums. EBITDA = Earnings before interest, taxes, depreciation, and amortization.
Management explained how Lemonade's AI systems continue to improve, with each iterative algorithm being used becoming more accurate than previous ones. Using previous models, Lemonade's loss ratio was exactly as predicted or better. The third-quarter net loss ratio to gross earned premiums fell to 36%, down from 67% last year and 83% in 2021. The loss ratio is heading in the right direction.
Another positive update was that management said it expects to be cash-flow-positive by the end of 2025, earlier than expected. The move to profitability is taking longer, so while Lemonade continues to post strong growth and improved profits, investors will need to remain patient until Lemonade reaches its goals.
Lemonade stock remains down 90% from its previous highs, and it trades at less than 3 times trailing-12-month sales. That's a high-growth company at a bargain stock price and it's worth a closer look.
2. Redfin: A better way to buy and sell homes
Redfin is a digital real estate company that combines a digital platform with real estate agents on the ground. It has greater reach and better technology than traditional real estate companies, leading to faster closings with competitive fees. It operates an end-to-end service model including 3D walk-throughs and a dedicated agent for buyers and sellers, as well as mortgages.
With the housing industry working to adapt to rising interest rates, Redfin has been struggling. According to Redfin's October data, available houses for sale declined by almost 9% year over year and the number of homes sold is down by nearly 7%. If demand for homes remains high, it leads to increased housing prices that are less affordable thanks to the higher mortgage rates. This all combines to drop Redfin revenue by 12% year over year in 2023's Q3.
However, the tide may be turning. In the four weeks ended Nov. 19, listings increased by their widest year-over-year margin since 2021. Average mortgage rates decreased from 8% to 7.3%, and last week applications increased 4% from the previous week.
Whether it's imminent or on the way, the housing industry will rebound. When it does, Redfin is poised to benefit. It's the most-visited brokerage website by far, with 5 times the amount of visits as its nearest competitor. It increased its market share by units in 2022 to 0.8%, up from 0.77% the year before, and almost doubling it over the past five years.
Image source: Redfin.
Redfin took action to stay competitive in this market, slashing its job count and winding down its iBuying business. Net loss improved from $90 million last year to $19 million this year, and management is guiding for revenue growth of between a 5% decline and 2% growth in the fourth quarter.
Redfin stock is down 93% from its highs, and it trades at only 0.3 times trailing-12-month sales, a true bargain for what could turn out to be an incredible growth stock.
Jennifer Saibil has positions in Lemonade. The Motley Fool has positions in and recommends Lemonade and Redfin. The Motley Fool recommends the following options: short November 2023 $12 calls on Redfin. The Motley Fool has a disclosure policy.
