When it comes to Luckin Coffee (OTCMKTS:LKNCY), it’s not all about pointing fingers, bad actors, or failed price charts and the like. Luckin stock is an important wake-up call. In a market made up of stocks, it’s always smart to hedge those sure things or the next, next big thing, to avoid the possibility of an ever-present painful burn. Let me explain.
For more than a few growth stock investors, Luckin Coffee was supposed to be the next Starbucks (NASDAQ:SBUX). Shares of the China-based upstart certainly looked ready to make good on that promise for a short while.
Luckin had massive growth. The company smartly utilized today’s mobile technology and brick-and-mortar locations to their benefit to win customers. The icing on the cake? Shares were relatively new to the market. Luckin only went public in 2019. And often, most growth stories of Luckin’s caliber see their largest stock gains during those first few years.
So, what could possibly go wrong for investors looking to get in near the ground floor of LKNCY and cash in? It turned out, a whole lot.
Not exactly a secret, accounting shenanigans concocted by Luckin’s top brass and uncovered during the height of the coronavirus dosed Luckin’s well-brewed narrative. Shares rightfully plummeted. It’s not even worth repeating the fallout or the ongoing fabrication which has been done ad nauseam and continues to this day.
If there’s any lesson to be learned, you’re not going to find it on a balance sheet, income statement, or price chart. Despite our country’s leadership nasty political saber rattling with China, the moral in LKNCY isn’t about not investing in untrustworthy Chinese companies. Luckin was a cheat of course. But to be very fair, the United States has had plenty of homegrown companies lie, steal, and worse.
Valeant Pharmaceutical is one memorable U.S.-based high-flier which imploded for similar improprieties. Enron was another high-profile mess. And let’s not forget Boeing (NYSE:BA) or PG&E Corp (NYSE:PCG) for recent transgressions still impacting investors today.
The reminder the Luckin Coffee story brings us is that investing is risky. Stocks are called risk-assets, right? That might be hard to remember right now if you’re riding high in Amazon (NASDAQ:AMZN), some other trillion-dollar club member, or even the broader market. But don’t make the mistake of forgetting or dismissing that feature when buying stocks.
Luckin Coffee used to be the property of growth investors. Now shares are in the hands of those that see a potential turnaround, value-play or alternatively, are eyeing the stock for bankruptcy based on other favored evidence.
Regardless of growth versus value or bull versus bear, putting blind trust in a company’s financial statements, a price chart, an analyst recommendation, etc., and then buying or shorting stock on the back of those type beliefs, can end very badly. But it doesn’t have too.
Luckin Stock Weekly Price Chart
Source: Charts by TradingView
Looking at the weekly chart of Luckin shares, I’m technically inclined to see a low forming. The bullish observation is supported by bearish sentiment that would be hard-pressed to get much worse. No disrespect, but heavily-lopsided analysis warning investors away from Luckin by roughly a dozen of my colleagues at InvestorPlace over the last couple weeks is evidence of an extreme hard at work.
Yet on the price chart, conditions are improving. After jumping 130% in less than two weeks to confirm a small double bottom, LKNCY has constructively pulled back in a bullish-looking consolidation that’s finding support at the 62% retracement level of a very volatile trading month for shares. Given the combined indications, Luckin looks great as a contrarian play. But that’s just one of many opinions out there.
The truth is it doesn’t matter if I see a bullish bottom using optimistic optics or alternatively, someone else believes the other shoe is sure to drop based on the same price chart. Similarly, it’s unimportant if one investor concludes LKNCY looks more attractive at a valuation of $650 million, while another despises it for that very reason.
Bottom-line, respect it takes two parties, a buyer and seller, to consummate a trade. Also appreciate every strategy has its day in the sun. And know this, too: If you buy and sell stocks you will be proven wrong along the way for a multitude of reasons. It won’t be a one-time incident, either.
But far from warning against having exposure to risk assets and no matter your style or outlook, I’d simply recommend purchasing a call contract, a put, or a limited risk spread to avoid a truly harmful burn. That should be a point of agreement among all types of investors in Luckin and beyond.
Chris Tyler is a former floor-based, derivatives market maker on the American and Pacific exchanges. Current investment accounts under management do not currently own positions in any of the securities mentioned in this article. The information offered is based on his professional experience but strictly intended for educational purposes only. Any use of this information is 100% the responsibility of the individual. For additional market insights and related musings, follow Chris on Twitter @Options_CAT and StockTwits