Editor’s note: This column is part of our Best Stocks for 2020 contest. Larry Ramer’s pick for the contest is Luckin Coffee (NASDAQ:LK). Following a delisting from the Nasdaq Exchange, the company now trades under the ticker LKNCY.
Obviously, my decision to choose Luckin Coffee (OTCMKTS:LKNCY) stock for the Best Stocks contest turned out to be a horrible one. Like many others — including BlackRock (NYSE:BLK), Credit Suisse and a Singaporean sovereign wealth fund — I did not suspect the company of fraud.
And like other LK stock bulls, I was upbeat about the stock due to Luckin’s huge sales growth and tremendous opportunity. Also worth noting is that I lost a significant (for me) amount of money on the shares.
Although the company’s huge sales growth was obviously based on fraud, I still think that the firm does have a huge opportunity. And despite its delisting, Luckin can still capitalize on this opportunity. Therefore, I believe that risk-tolerant investors should take a small position in the shares.
Luckin Coffee Still Has a Tremendous Opportunity
Luckin’s fraudulent accounting didn’t change the fact that coffee consumption is growing rapidly in China. It also didn’t change the fact that Starbucks’ (NASDAQ:SBUX) drinks are way too expensive for the vast majority of Chinese citizens to buy on a regular basis.
Coffee generated revenue of $8.2 billion in China last year. Analysts expect that revenue to increase at a compound annual growth rate of 11.3% between 2019 and 2023.
Meanwhile, Luckin reportedly sells coffee for $3.50 a cup, while “an average cup of coffee at Starbucks is $4.80.” You can even get a chicken wrap at a Luckin store for just $1.50.
Critics have said that Luckin charges too little for coffee. But its efforts to raise prices caused demand to sink tremendously. Despite all the critics, and despite its troubled history, I’m still betting on an opportunity in LK stock … or well, LKNCY stock.
Mapping a Path Forward for LK
I have a few ideas that could help Luckin. First of all, it should either raise the prices of its sandwich offerings or scrap them completely. Charging $1.44 for chicken wraps doesn’t sound sustainable. And as I’ve suggested in the past, it should consider selling more products, including coffee, from reputable Western companies like Nestle (OTCMKTS:NSRGY) and Unilever’s (NYSE:UL) Lipton.
Luckin could probably charge much higher prices for products from such highly reputable Western companies than for its own coffee and tea.
I think the combination of rapidly growing demand for coffee in China, Starbucks’ high prices, the huge number of Luckin stores, China’s strong macroeconomic position and Luckin’s fairly untarnished brand (more on that later) give the company a good opportunity to develop a legitimately strong, highly profitable business.
As I’ve also noted previously, Luckin should hire a CEO who has worked for a reputable Western company. Recruiting such an individual would go a long way toward restoring investors’ confidence in Luckin stock. I think there’s a very good chance that Luckin will indeed hire such a person — at least after it resolves its internal struggles.
Tackling a Few Misconceptions About Luckin
In recent weeks, many business news outlets have acted as though the sky was falling for Luckin. That’s because it was undergoing the delisting process, and because it committed fraud.
But the reality is that being relegated to the pink sheets isn’t a death sentence for Luckin stock. Shares of many foreign companies, including Nestle, Volkswagen (OTCMKTS:VLKAY) and Tencent (OTCMKTS:TCEHY) trade on the pink sheets. All of those stocks have high daily volumes, and, over the years, have generated significant profits for some of the investors who have bought them.
Secondly, sometimes people have trouble seeing things from a different point of view. To those of us who owned Luckin stock and were badly burned by the company’s cheating, its brand has been forever tarnished. We likely feel terribly victimized by the firm.
However, I think many American investors are ignoring the fact that most Chinese consumers likely have a different perspective on Luckin. Very few of its customers have probably ever owned its stock, which was, until very recently, trading on the Nasdaq Exchange. And the company has not been accused of harming its customers in any way. So although Luckin’s image has deteriorated horribly among American investors, it’s likely still very much intact among Chinese consumers.
And as I pointed out in a prior column, multiple American companies, including Kraft Heinz (NASDAQ:KHC), Marvell Technology (NASDAQ:MRVL) and Wells Fargo (NYSE:WFC), have done fairly well after being involved in pretty big scandals.
Best Stocks: Don’t Give Up on Luckin Just Yet
Most Americans are leaving Luckin for dead. This makes me question: At a time when the U.S. is engaging in a national dialogue about racism, would Wall Street treat an American company the same way? For instance, what if we learned Dunkin’ Brands (NASDAQ:DNKN) had fabricated $310 million in sales? Would DNKN stock lose 90%-plus of its value?
I have my doubts.
Investors are treating Luckin as though it’s definitely dead in the water. But that’s actually far from the case. Therefore, I believe that risk-tolerant investors should consider taking a small position in the name.
Larry Ramer has conducted research and written articles on U.S. stocks for 13 years. He has been employed by The Fly and Israel’s largest business newspaper, Globes. Larry began writing columns for InvestorPlace in 2015. Among his highly successful, contrarian picks have been GE, solar stocks and Snap. You can reach him on StockTwits at @larryramer. As of this writing, the author owned shares of Luckin stock.