Luckin Coffee (NASDAQ:LK) stock climbed the abyss that was its 75% drop after it announced its massive accounting fraud earlier this April. Last week alone, LK stock jolted up 155%.
It was a slow news week for Luckin. It is not a large position in any major indices, so the only inference that can be drawn on its recent rally is from the Consumer Discretionary ETFs. Since the middle of March, the Consumer Discretionary SPDR Fund (NYSE:XLY), is up over 50%, while the broader market measured by the S&P 500 was up about 33% over that same time frame.
Fund net cash flows have also pointed to an improved outlook over the last few weeks for the broader international equity market. Data from the Investment Company Institute points to declining outflows from international stock funds over the past four weeks ending May 27. This typically precedes changes in sentiment and ultimately recovery in particular sectors.
LK Stock: More Jobs, More Coffee Breaks
The improving employment situation has created broad-based optimism on the global stock market. With businesses reopening both in the United States and abroad, we are closer to a point that consumers will feel comfortable loosening up their purse strings for non-essentials.
Most economists believed that May’s unemployment figure would solidify these past three months as the worse employment situation since the Great Depression. Investors were shocked to wake up to a report by the United States Bureau of Labor Statistics which showed a decline in unemployment from 14.7% in April, to 13.3% in May. This will be good for stocks of companies whose main focus is servicing discretionary needs.
What will drive LK stock’s continued advancement will be thawing demand for non-essentials in China. McKinney & Company’s research provides a glimmer of hope. Based on survey data collected in China from May 19 to May 25, most people were optimistic that their consumption habits would increase on most outside activities, such as shopping for non-essentials.
Although in-person visits to stores and shops are expected to see a decline, the ability to offer coffee and snack combo vending machines will place Luckin in a good position to serve more customers post-COVID, and even contribute meaningfully to profitability in the long-term.
Light Roast or Dark Roast?
What remains to be seen is what impact the fraud investigations will have on LK stock. Any day now Luckin Coffee will have a hearing with the NASDAQ Hearings Panel to determine if LK will remain listed. Since the announcement, the board has made corrective actions.
The board terminated CEO Jenny Zhiya Qian and COO Jian Liu, along with six other employees at the center of this scandal. Mr. Jinyi Guo has been appointed to director of the board, Senior VP of the company, and as acting CEO, along with a whole host of board shuffles. Only time will tell whether it is enough.
If the recent market rally is any indication, investors believe that the recent personnel changes will give Nasdaq confidence to hang on to the LK stock listing. I believe the stock is getting ahead of itself. I would like to see at least one quarter with guidance being declared and achieved, along with a nod from regulators that Luckin Coffee has made substantial enough changes to remain investible.
As of the time of this article, the author did not hold shares of Luckin Coffee.
