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Don’t Write Luckin Coffee’s Obituary Yet

Practically every article you read about Luckin Coffee (NASDAQ:LK) stock lately has been negative. Frankly, it’s hard to blame folks for leaning bearish on a stock when there’s a trading halt in effect with no established endpoint.

Why You Shouldn't Write the Obituary for LK Stock Yet

Source: Keitma / Shutterstock.com

If you’d like to explore the bearish side of the roller-coaster ride that is LK stock, feel free to read Will Ashworth’s persuasive article. I promise that no one will be offended if he convinces you to avoid the stock at all costs.

“At all costs” may not be the most appropriate phrase to use, actually, since you might not be able to buy LK stock at any cost. It’s entirely possible that when the shares are tradeable, they could go to zero. This is a scenario that should be kept in mind when mulling the risk-reward profile of this stock.

With that, let’s brew up a strong cup of joe and see if it’s even possible to construct an argument in favor of owning LK stock.

Hard Facts to Swallow

Even staunch defenders of the company can’t deny that Luckin has been mired in controversy lately. There’s a good reason that trading on LK stock has been halted for three consecutive weeks.

First, there was the internal investigation which revealed that Luckin COO Jian Liu and a number of employees had fabricated $310 million worth of the company’s transactions. In other words, it was suggested that $310 million in reported sales were completely made up.

This makes every recent report of Luckin’s sales and revenue figures suspicious. For instance, in the third quarter of last year, Luckin posted an incredible 640% year-over-year increase in revenue.

Indeed it is “incredible” in the sense of being impossible to believe now that the company’s fiscal-reporting history is tarnished. As for the shareholders, it’s understandable if they’re struggling to trust anything the company says at this point.

On April 7, the Nasdaq stock exchange halted trading on LK shares. This occurred after the stock price had already retreated 80%. On April 28, Luckin revealed that it was being investigated by the State Administration for Market Regulation, a Chinese regulatory entity.

So, let’s recap: $310 million in allegedly fake transactions, the Nasdaq halts trading on the stock and Chinese regulators are investigating the company. The fall from grace has been dramatic, to say the least.

Looking at the Bright Side

In normal situations, we can say that all of the available news, good and bad, has been priced into a stock. That’s a foundational principle of the efficient-market theory.

However, in the case of LK stock, it’s awfully hard to say that the bad news has been “priced in” if the shares have no price. But there will be a price assigned to the stock at some point, assuming the trading halt is lifted eventually.

A tidal wave of negative price action will likely result from panic selling in the short term. That’s to be expected since the recent news has been, to put it politely, inauspicious.

This might not convince you, but it’s worth noting that Luckin says it’s “actively cooperating” with the State Administration for Market Regulation’s investigation.

Luckin also points out that the company’s stores throughout China remain open. Therefore, there are undoubtedly revenues coming in, even if the reporting of those revenues might be suspect.

As investors, sometimes we have to think like consumers. Will coffee drinkers care much about Luckin’s corporate reputation? Or are they mostly just interested in getting their morning caffeine?

In all likelihood, the company will cooperate with regulators and the shares will stay above zero. If you’re bold enough to buy at a low price, your contrarian approach just might be rewarded.

The Takeaway on LK Stock

So there you have it: a semi-positive take on LK stock.

The shares are little more than a lottery ticket at this point, no doubt. But who knows — adventurous investors could brew up some robust profits at some point.

David Moadel has provided compelling content – and crossed the occasional line – on behalf of Crush the Street, Market Realist, TalkMarkets, Finom Group, Benzinga, and (of course) InvestorPlace.com. He also serves as the chief analyst and market researcher for Portfolio Wealth Global and hosts the popular financial YouTube channel Looking at the Markets. As of this writing, David Moadel did not hold a position in any of the aforementioned securities.


Article printed from InvestorPlace Media, https://investorplace.com/2020/05/dont-write-luckin-coffees-obituary-yet-lk-stock/.

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