Buy Luckin Coffee Shares and You’ll Only Get Burned

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A recent jolt in Luckin Coffee (OTCMKTS:LKNCY) shares might have given a caffeine-like jolt to investors. Indeed, at the time it may have felt as if Luckin stock was poised for a delicious comeback.

close up luckin coffee's logo coffee brand in Shanghai, June 2019.
Source: NewsToday / Shutterstock.com

I hate to be a buzz-kill, but this isn’t the time to take a long position in Luckin stock. Even stocks representing troubled companies can still have spikes along the way to much lower prices.

It’s going to be tough to convince folks of the dangers associated with Luckin stock. The shares currently trade on the over-the-counter market, which is a playground for speculators. Moreover, Luckin is considered a penny stock because it trades for less than $5. Again, this makes it a prime target for gamblers.

A small position in Luckin stock might be okay as a “lottery ticket” as long as you wouldn’t mind the possibility of losing your investment. Just don’t let an occasional price surge lull you into a false sense of complacency.

A Closer Look at Luckin Stock

Luckin stock wasn’t always classified as a penny stock. In fact, it traded the Nasdaq stock exchange earlier this year and the share price was substantially higher than it is today.

Being delisted from the Nasdaq appears to have put an invisible ceiling on Luckin stock. The shareholders will be lucky to see the stock trade above $5 this year, not to mention in the double digits.

Perhaps someday Luckin’s market capitalization and share price will be high enough that Nasdaq would consider re-listing the stock. However, I wouldn’t count on that happening anytime soon. Even the recent price spike to $3 wasn’t sustainable, unfortunately.

At the close of Sept. 11, Luckin stock had fallen back down to $2.35. From this incident, we can conclude that chasing the stock after it pops isn’t a great strategy.

A Stained Reputation

Hindsight is 20/20, so I will resist the temptation to mock the folks who had high hopes for Luckin. Still, we can at least enjoy the Zhejiang University of Finance and Economics researchers’ analysis that “As Luckin Coffee enters the international market, it has become a symbol of globalization, showing China’s coffee brand.”

Obviously, that analysis turned out to be painfully off-base. Still, hopes ran high back in January of this year. That’s when the Luckin share price touched its all-time high of $50.38.

Some traders in the United States were even calling Luckin the Chinese version of Starbucks (NASDAQ:SBUX). At that time, it was still fresh in investors’ minds that Luckin had posted a 640% year-over-year increase in revenue for 2019’s third quarter.

But the next thing you know, an internal company investigation revealed that senior executives and employees at Luckin had fabricated $310 million (or 2.2 billion RMB) worth of the company’s transactions.

Fraud Leaves a Bad Taste

It’s going to be difficult for Luckin to recover from its fraud scandal. Even if coffee consumers may sometimes choose convenience over integrity, investors will need time to forgive and they won’t soon forget.

Just the word “fraud” should be enough to put an invisible ceiling on just about any price spike in Luckin stock. But what caused the late-August surge to $3? Was there good news, a sign of encouragement?

I searched high and low for some sort of positive catalyst, but found none. It’s true that here was an executive-level shakeup at Luckin. However, the timing of that event didn’t line up with the share price movement.

InvestorPlace contributor Ian Bezek summed up the most likely explanation. He wrote, “traders are enjoying the low volume and limited liquidity in Luckin’s over-the-counter stock listing.”

Moreover, “With an inefficient trading situation, there are wide swings in the share price, making it ideal for short-term swings.” That’s as reasonable an explanation as I’ve seen so far. And, there’s nothing bullish there for Luckin shareholders to hang their hopes on.

The Bottom Line

The purpose here is not to criticize Luckin stock bulls. I’m only trying to provide a warning that the stock is highly speculative, at best. At worst, it’s a stake in a company associated with the word “fraud.” And that is a word that’s not easily forgiven, or forgotten.

On the date of publication, David Moadel did not have (either directly or indirectly) any positions in the securities mentioned in this article.

David Moadel has provided compelling content – and crossed the occasional line – on behalf of Motley Fool, Crush the Street, Market Realist, TalkMarkets, TipRanks, Benzinga, and (of course) InvestorPlace.com. He also serves as the chief analyst and market researcher for Portfolio Wealth Global and hosts the popular financial YouTube channel Looking at the Markets.


Article printed from InvestorPlace Media, https://investorplace.com/2020/09/buy-luckin-stock-and-youll-only-get-burned/.

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