Why You Should Avoid Shares of Luckin Coffee

If you’re mystified by the popularity of bankruptcy stocks, watch out because there’s a spin-off in the works. Luckin Coffee (OTCMKTS:LKNCY) has evidently become the poster child of a new and unsettling trend: scandal stocks. Thus, in a market where bad is good and worse is even better, Luckin stock is a hot item.

Tempting as It May Be, LK Stock Isn’t Worth the Immense Risk
Source: Keitma / Shutterstock.com

If Luckin stock posts a handful of big green days as the company swirls down the drain, don’t be surprised if the trading volume spikes. That’s just the speculators jumping into the fray and trying to time their trades for quick gains. Feel free to ignore them and continue to proceed as an informed, rational investor.

Yet, we can’t ignore the speculators completely as they’re a force that shapes the markets. The scandal-stock phenomenon could actually gain traction if the Luckin stock price goes up. Since that’s a possibility, could there actually be merit to the bull case for Luckin?

A Farewell and a Welcome for Luckin Stock

It’s out with the old and in with the new for Luckin stock traders as, alas, they won’t find the shares on the Nasdaq anymore. The stock’s new home is on the over-the-counter market with the old ticker LK replaced by the harder-to-remember LKNCY.

Few observers would doubt that this represents a demotion. Relegated to the OTC market from the esteemed Nasdaq, Luckin stock’s walk of shame consisted of a brief, unceremonious announcement that the company wasn’t going to resist the delisting anymore.

By all logic, being consigned to the lowbrow Wild West of the OTC market should have been enough to dissuade participation of the trading community. But then, logic was furloughed from its role in the financial markets months if not years ago.

Hence, traders welcomed LKNCY with open arms as millions of shares changed hands at the get-go. No earnings, no price-to-earnings ratio? No problem! Risk-tolerant folks still love Luckin stock almost as much as their morning coffee, it seems.

Another Day, Another Scandal

Even amid almost daily discouraging developments, LKNCY remains popular with the speculative crowd. Some folks actually seem to thrive on the scandals, perhaps viewing them as dip-buying opportunities.

It’s fascinating and worrisome at the same time as the Luckin story reads like the final act of a Shakespearean tragedy rewritten as a third-rate soap opera. Two days after the Nasdaq delisting, Luckin “substantially” completed its internal probe and, to no one’s surprise, found evidence of fraudulent activity.

Just for kicks, let’s review the bullet points of the probe:

  • Over 550,000 documents reviewed and more than 60 witnesses interviewed
  • Fraudulent activity began in April 2019
  • 2019 sales inflated by 2.12 billion yuan (approximately $300 million)
  • 2019 expenses inflated by 1.34 billion yuan (around $190 million)
  • Transactions were likely fabricated/falsified by, among others, CEO Jenny Zhiya Qian and former COO Jian Liu

Wait, There’s More

Along with all of that, Luckin’s board agreed to meet the next day to vote on whether to fire Co-founder and Chairman Charles Zhengyao Lu. Scandal-stock speculators notwithstanding, internecine corporate-level machinations are rarely net bullish.

Yet the show must go on, and so it did. The next day, the board did indeed take a vote on whether to oust the disgraced chairman. After all was said and done, the chairman remained disgraced but not ousted.

That’s right: they couldn’t muster up enough votes to kick the guy out. What the company’s left with, then, is an unwanted chairman, some empty executive-level seats, and a public-relations nightmare that will tarnish whatever vestiges remain of Luckin’s reputation.

The Bottom Line on Luckin Stock

Speculators will speculate and Luckin stock will likely remain a popular trading vehicle, cavalcade of scandals notwithstanding.

For anyone seeing Luckin as an investment of merit, though, I strongly advise that you wake up and smell the coffee.

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/2020/07/avoid-scandal-stocks-in-general-and-luckin-stock-in-particular/.

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