On June 26th, Luckin Coffee (NASDAQ:LK) tumbled more than 50%. The company withdrew its request to make a case for continuing its listing on the Nasdaq. Luckin stock was pulverized, then suspended for trading on June 29th.
It was not a good ending and certainly not the one that bulls were hoping to see. To be quite frank, I’m not sure what investors were looking for with this name. If they were going to pick over the scraps, they had to know it was pure speculation.
To be fair, speculation can be completely fine — so long as it is done in the right manner.
Speculation vs. Investing
Before accounting issues were found, Luckin Coffee traded pretty well. Once the news was out though, many investors stepped aside. They have learned — either the hard way or from others — that accounting issues equals “no touch,” and certainly not “go long.”
We’re in strange times, though. Bankruptcy stocks, like Chesapeake Energy (NYSE:CHK) and Hertz (NYSE:HTZ), have caught huge bids off the lows. While the rallies have been unsustained, one can see why some investors thought perhaps LK stock was worth holding.
That’s the difference between investing and speculating. Buying Hertz, Chesapeake or Luckin was buying into the hope that perhaps the stock would double, triple or become some sort of a multi-bagger.
In other words, they are somewhat like call options. Meaning that they have the potential to go up several times the original investment, but they also have the potential — and depending who you ask, the likelihood — to go to zero.
If done with low enough risk, speculation is fine. Because we have to remember these securities can become worthless and they can do so in the blink of an eye. As a result, risk management is virtually non-existent, with the exception of knowing that investors can wake up in the morning with these shares being worthless.
Alternatives to LK Stock
Click to Enlarge
Back in May, I wrote the following on Luckin Coffee:
“If I’m not long Luckin now, there’s no way I’m buying this stock. Where there’s smoke, there’s fire. There’s hundreds of quality stocks to own right now and one that just fell 80% on cooked books is not one of them.”
That’s the simple truth, too. Of all of the great companies trading at a discount to where they were trading at the start of the year, why would investors go with a stock that just fell 80% on accounting issues?
If coffee and China are the two ingredients one needs in their portfolio, why not consider Starbucks (NASDAQ:SBUX) instead? The company has a solid balance sheet, reputable and dependable management and steady growth.
Well, it had steady growth before the novel coronavirus came around. By and large though, investors can count on this company. For starters, it’s profitable, free cash flow positive and has sound financials.
When it comes to 2020 though, the feeling is mixed. Analysts expect Starbucks to earn 90 cents per share this year. While good that it’s expected to generate a profit, that result is down almost 70% vs. 2019’s earnings results. The costs related to Covid-19 are building up, as revenue is forecast to fall just 12.5% this year.
The U.S. is Starbucks’ largest market, followed by China. The company committed to building hundreds of stores per year for several consecutive years in China, as the potential in this country was clear. It’s why Luckin stock popped up out of nowhere, only to turn out to be a fraud.
Starbucks could have a bumpy second half of 2020, but for the long term, this company will get it done for investors. In recent years, SBUX has made a larger commitment to the dividend and it shows. Shares now yield 2.23%, a generous payout compared to the 64 basis point yield of the 10-year Treasury bond.
Bret Kenwell is the manager and author of Future Blue Chips and is on Twitter @BretKenwell. As of this writing, Bret Kenwell is long SBUX stock.
