I wouldn’t classify Luckin Coffee (OTCMKTS:LKNCY) as a “bankruptcy play” like Hertz (NYSE:HTZ) or Whiting Petroleum (NYSE:WLL) because technically it doesn’t fall into that category. Yet, for a while I lumped Luckin stock in with those other ones because I expected that insolvency was right around the corner.
Sometimes it’s perfectly okay to flip-flop on a stock. Recently I looked through the news developments concerning Luckin, and I didn’t see anything terrible. Is it possible that the worst is over for Luckin stock holders?
The company just brought someone back to its board of directors, and this individual might provide value to Luckin. Plus, Chinese authorities imposed a punishment on Luckin for its malfeasance, but the penalty wasn’t too severe.
So, maybe Luckin stock can turn around as the proverbial dust finally starts to settle. It’s a risky bet, but it’s one worth considering.
A Closer Look at Luckin Stock
As I reported previously, Luckin stock used to trade on the Nasdaq stock exchange, which at one point halted trading on LK shares. By the time it was halted, the share price had already declined by 80%.
Eventually, Luckin stock was booted from the Nasdaq exchange altogether. Today, it resides on the over-the-counter markets. And since the middle of July, Luckin shares seem to have stabilized somewhat as they’ve traded in a range between $2 and $3.
That’s a wide range, granted, but at least some boundaries have been established. Besides, we’ve seen much bigger price movements on the over-the-counter markets. From that perspective, Luckin stock has been pretty tame lately.
Since it’s a low-priced stock, it’s advisable to only take a small position in Luckin stock if you’re going to take a position at all. Volatility should be expected, which means both greater risk and greater potential rewards.
Back on the Board
Not long ago, a filing from the U.S. Securities and Exchange Commission disclosed that Luckin reappointed Sean Shao as an independent director to the company’s board of directors.
Shao has served as the independent director and/or other executive-level roles at a large number of companies in the past. Besides, Shao is also a member of the American Institute of Certified Public Accountants.
Moreover, as InvestorPlace contributor Will Ashworth points out, Shao played an essential role during Luckin’s most scandal-ridden period. Specifically, Shao “had been in charge of the company’s independent investigation into the accounting issues in 2020.”
Perhaps, then, the re-installment of Shao will demonstrate to the trading community that Luckin is, to borrow a phrase from Todd Shiber, “prioritizing independence on its board.” Or at the very least, Shao’s presence could prompt Luckin to stay on the straight and narrow path.
Slap on the Wrist
For a long time, stock traders waited for the hammer of justice to come down on Luckin. In reality, it turned out to be a rather soft, mild hammer.
So, here’s the final judgment against Luckin. Reportedly, Chinese regulators decided to fine Luckin and a number of connected firms a total of 61 million yuan, which would equate to $8.98 million.
The fined firms include two Luckin entities as well as 43 companies that had allegedly abetted Luckin in committing its fraudulent accounting activities.
In other words, Luckin’s burden isn’t even the full 61 million yuan because that fine is being spread across 45 companies. Moreover, Luckin’s own internal investigation found that the company had inflated its reported revenues by roughly 2.12 billion yuan last year.
Therefore, Luckin’s fine is little more than a slap on the wrist. If you feel that justice hasn’t truly been served here, that’s understandable. For Luckin stock holders, however, it’s surely a relief to know that the punishment wasn’t all that bad.
The Bottom Line
To be frank, Luckin stock is only for highly risk-tolerant investors. Yet, at least the company has Shao back on its board and he has a strong track record. Plus, the hammer of justice wasn’t too hard on Luckin, so the shareholders can breathe a sigh of relief.
On the date of publication, David Moadel did not have (either directly or indirectly) any positions in the securities mentioned in this article.