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Despite Turnaround Potential, Pause on Disgraced Luckin Stock for Now

After imploding earlier this year, should you buy Luckin (OTCMKTS:LKNCY) stock? The coffee chain, once touted as the “Starbucks (NASDAQ:SBUX) of China,” saw its share price destroyed after an accounting scandal decimated its reputation. But even now, it’s hard to tell whether this stock will bounce back, or keep on heading lower.

Luckin Stock
Source: Keitma / Shutterstock.com

Granted, shares have fallen more than 85% since the now-confirmed frauds first came to light. And, the company’s shares got delisted from the NASDAQ, moving to the over-the-counter (OTC) market. But, you still can make the case that this stock is a fantastic turnaround play at today’s low prices.

However, this catalyst remains a bit of a gamble. Firstly, said rebound remains a long-shot. Secondly, there are other risks to consider, that could put further downward pressure on Luckin stock.

With this in mind, it’s too early to consider shares a bottom-fisher’s buy. That’s not to say the stock can’t rally further. But, to dive into shares today is more of a gamble than a sound investment.

Can Luckin Stock Rise From The Ashes?

Despite the company’s obvious red flags, you can make a bull case for this tarnished growth stock. How so? As it recovers from its headline-making accounting scandal, the company has a chance to turn things around, and remain on the growth train.

As our own Luke Lango wrote Jul 9, there’s plenty of reason why the company can pick up the pieces, and get back on track.

Granted, as we know now, the company’s epic sales growth previously reported wasn’t as it seemed. But, with the company the largest coffeehouse operator in China, they still have a shot at living up to its “Starbucks of China” moniker.

In his article, Lango ran the numbers. Based on his calculations, there’s potential for Luckin to continue growing through this decade, perhaps becoming worth 24 times what the company’s value is today.

Yet, while the potential for shares to appreciate significantly in the coming years seems like an invitation to buy, there are major caveats. Namely, right now the company doesn’t have the cash in its coffers to fuel the aforementioned ambitious expansion. And with its bad reputation in the capital markets, Luckin could face significant hurdles executing a debt or equity offering.

However, this is assuming this “best case scenario” is still in motion. Consider the other red flags (besides the obvious accounting fraud from earlier this year). Taking these into account, this becomes an even greater long-shot of a turnaround stock.

Why Investors Could Get Burned Again

While there’s a pathway for shares to head higher, there are other factors at play that could push Luckin stock even lower from today’s price levels (around $3.75 per share).

As this commentator noted, ousted Chairman Charles Lu had a hand in picking the company’s replacement board. In other words, the company may not have truly “cleaned house.” Instead of wiping the slate clean, things could continue to deteriorate.

Also, the risk of a “take-under.” As InvestorPlace’s Ian Bezek wrote Jul 13, it’s common for disgraced Chinese-based, U.S.-listed companies to buy out their American listing. That is to say, buy shares sold to U.S. investors at fire-sale prices, only to take the company public again on the Chinese markets. At a higher valuation.

Sure, perhaps you could wind up buying Luckin stock today, and the company’s management buys out the U.S. listing at a premium to today’s prices. They’re still getting a bargain, considering where shares traded a few months prior. While you, as a short-term speculator, have locked in a quick gain.

Conversely, shares could fall back to prior lows (under $1 per share). Then, the company’s management could come out with a low-ball bid. In other words, this valid concern remains on the table.

Also, consider that the OTC listing limits the potential for speculation to help drive shares higher. Granted, plenty of brokerage platforms allow retail investors to buy over-the-counter stocks. But Robinhood isn’t one of them. In other words, there’s no potential “Robinhood effect” to speak of with this stock.

Wait for Luckin Stock To Pull Back Before Considering A Position

Despite the red flags listed above, it’s too late to short LKNCY. Going short shares today, after they’ve cratered in value, leaves you exposed to a potential short squeeze. Even if the company only improves slightly from where it stands today.

Yet, buying now may not be the best move. The turnaround catalyst may be in motion. But, could also now be more than priced into shares.

With plenty of downside risk still on the table, long-shot Luckin stock may be a better buy if it falls back towards prior lows. Keep it on your radar, but hold off for now.

Thomas Niel, contributor to InvestorPlace, has written single-stock analysis since 2016. As of this writing, Thomas Niel did not hold a position in any of the aforementioned securities.


Article printed from InvestorPlace Media, https://investorplace.com/2020/07/disgraced-luckin-stock-hold-off-now/.

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