As of June 29, Beijing-based coffee retailer Luckin Coffee (OTCMKTS:LKNCY) got delisted from the NASDAQ Exchange. Now, Luckin stock is a penny stock that may also be a bankruptcy-candidate.
There has recently been increased day trading interest in shares of potentially bankrupt companies, such as Hertz Global (NYSE:HTZ), JCPenney (OTCMKTS:JCPNQ), and Whiting Petroleum (NYSE:WLL). As a result many analysts are wondering if equity markets have become over-speculative in the post-coronavirus world.
It might be time for investors to accept the reality that some companies are bankrupt and their stocks are not worth their hard-earned cash. Although Luckin Coffee has not yet declared bankruptcy, investors may be better off if they look for better companies for their long-term portfolios.
How Luckin Stock Got Delisted
The Xiamen-based company started operations in Oct. 2017. Since its early days, Luckin stock has been touted as the Starbucks (NASDAQ:SBUX) of China.
In May 2019, the company went public in the U.S. as an American Depositary Receipt (ADR) at an opening price of $25. Luckin Coffee offered 33 million American Depository Shares in its IPO. And it raised $571.2 million through the IPO.
In China, listing requirements are in general quite strict and lengthy. Chinese stock exchanges would have required Luckin to have been profitable over the three years prior to the proposed IPO date. In other words, it could have not listed in China. The group possibly initially chose the U.S. due to easier listing requirements for ADRs.
The LK share price hit an all-time high of $50.38 on Jan. 17. But the story has changed and gone literally downhill since then.
On April 2, management said that it was investigating reports that senior executives and employees fabricated transactions totaling $310 million (or 2.2 billion RMB). It also urged investors to not rely on its previous financial statements for the nine months ended September 30, 2019.
As a result, Luckin stock tanked from a closing price of $26.20 on April 1 to an opening price of $4.91 the next morning. Then trading got halted on April 7, when the share price was at $4.39.
On April 27, the headquarters of the scandal-hit chain was raided by regulators in China. And the stock started trading again on May 20. In late June, the company notified shareholders of the delisting.
Finally, in recent days, shareholders voted out its chairman Charles Lu, who was also a co-founder. However, the issue of trust is likely to linger over Luckin Coffee for a long time to come. It would also mean the company would find it extremely difficult to raise fresh capital, at least in the U.S.
Where to Invest for the Love of Coffee in China
Many know China as a nation of tea-drinkers. But coffee consumption has also begun to take off in the country. That consumer trend was in part behind the initial interest behind Luckin stock.
Are you an investor who would like to take invest in the potentially lucrative market of coffee in a land of 1.4 billion residents? Then you may want to do due diligence on SBUX stock. Starbucks has over 4,300 stores across China.
On April 28, the Starbucks chain released Q2 Fiscal 2020 results that said its quarterly global same-store sales fell 10%. Americas and U.S. comparable store sales declined 3%. For the quarter, adjusted earnings per share came at 32 cents. Revenue was $6 billion, a decline of 5% from the prior year due to lost sales related to the viral pandemic.
Starbucks management also warned that third-quarter results would take a larger hit from the COVID-19 outbreak, even though sales in China were recovering.
Starbucks opened 255 net new stores in the quarter, which means a 6% YoY unit growth. At the end of the period, it had 32,050 stores globally, of which 51% and 49% were company-operated and licensed, respectively.
So far in 2020, SBUX stock is down about 15.5%. Long-term investors may consider buying dips on SBUX stock, especially if it goes toward $70 or lower. I regard it as one of the best dividend-paying stocks to buy, especially in a long-term portfolio. The current dividend yield stands at 2.3%.
The Bottom Line on Luckin Stock
Following a major revenue fraud, the rather short trading history of Luckin stock in the U.S. seems to have come to a halt. But there are other ways to invest in the growing consumer markets in China.
In addition to the Seattle-based coffee chain Starbucks which has established Chinese operations, investors may also consider researching China ETFs. Examples would include the Global X MSCI China Consumer Discretionary ETF (NYSEARCA:CHIQ), the VanEck Vectors ChinaAMC SME-ChiNext ETF (NYSEARCA:CNXT), or the Xtrackers MSCI All China Equity ETF (NYSEARCA:CN).
Tezcan Gecgil has worked in investment management for over two decades in the U.S. and U.K. In addition to formal higher education in the field, she has also completed all 3 levels of the Chartered Market Technician (CMT) examination. Her passion is for options trading based on technical analysis of fundamentally strong companies. She especially enjoys setting up weekly covered calls for income generation. As of this writing, Tezcan did not hold a position in any of the aforementioned securities.
