What to Do With Luckin Stock After Its Recent Bounce

Is there life after delisting? In prior years, when a company was booted off the New York Stock Exchange or Nasdaq, that was usually the end of the line. A company went bankrupt or otherwise ceased operations, and the shareholders got nothing. But Luckin Coffee (OTCMKTS:LKNCY) lives on after a massive scandal. Luckin stock has jumped from $1 back up to $2.50, giving shareholders a boost.

Luckin (LKNCY) logo on the wall of a coffee shop with a customer sitting at a table below it.
Source: abolukbas / Shutterstock.com

This is a bit of a surprising twist. Former members of Luckin’s management team committed massive accounting fraud and the company had to withdraw its recent financial statements. The company gave up its Nasdaq listing and is now trading on the over-the-counter exchange.

What’s more, many members of the company’s board of directors resigned their posts as well. So why are traders still taking an interest in Luckin after its steep fall from grace?

Traders Aren’t Reacting To News

With all the excitement in Luckin stock recently, you might expect that something is going on fundamentally. However, there appears to be little of note.

At least judging by Luckin’s official website, there have been few developments in recent months. In July, the company appointed “light-touch” liquidators to help renegotiate the company’s obligations and maximize remaining shareholder value.

Since then, Luckin has only reported that certain board members have resigned from the company, while others have stayed on. None of these developments is the sort of thing that seems likely to have caused the recent doubling of Luckin’s stock price.

Rather, it seems, traders are enjoying the low volume and limited liquidity in Luckin’s over-the-counter stock listing. With an inefficient trading situation, there are wide swings in the share price, making it ideal for short-term swings.

A Possible Bull Case

The best argument for Luckin is that while it’s disgraced, it’s still got a chance at a comeback. That’s more than you can say for most companies that are kicked off a major stock exchange. Luckin sold stock to the general public while shares were near their peak, and in doing so, the company raised hundreds of millions of dollars.

If that cash is still at Luckin rather than disappearing as part of the fraud, there could be a comeback. The company states that it had $780 million in cash and equivalents as of June 30. However, that figure was not audited.

Luckin concedes that the true amount of cash available may be different. If you assume the cash is there and will be deployed to try to turn the business around, however, Luckin still has a shot. The company’s (reported) losses were manageable in 2019, and nearly a billion dollars would give them several years of capital to work with before funding might run out.

The Concept Is Still Viable

I can’t blame traders for still be interested in Luckin stock. After all, whoever ends up being the Starbucks (NASDAQ:SBUX) of China is going to be a valuable enterprise. Sure, Luckin probably isn’t going to be the eventual winner on that front. But when the stock used to trade for $50 and now it sells for $2.50, there is a certain speculative appeal.

Despite the pandemic, Starbucks itself has reported reasonably strong numbers. It doesn’t seem that the long-term demand for the product is going anywhere.

Just remember that the odds are stacked against you. It’d be tricky enough for a U.S.-based company to mount a comeback after massive accounting fraud and much of its management team departing. Once credibility is lost, it’s hard to get back.

The situation is made even more difficult since Luckin operates out of China. Historically, numerous China-based companies have defrauded U.S. investors and then disappeared. It’s hard to know whether the management team will have its incentives aligned with foreign shareholders or not.

Luckin Stock Verdict

Luckin could still make a recovery. Stranger things have happened. Unlike most other companies that get booted off a major stock exchange, Luckin is not bankrupt. If its financial reports are even somewhat accurate, it should still have plenty of cash. So, while the firm is disgraced, it probably isn’t on the brink of insolvency.

And no one disputes that the stores are real. Even the short sellers agreed that Luckin has a wide installed store base around China. So, it’s not game over for Luckin yet. Given the accounting fraud and the lack of a major stock exchange listing, Luckin remains a highly speculative play, though. Don’t invest any money in Luckin stock that you can’t afford to lose.

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

Ian Bezek has written more than 1,000 articles for InvestorPlace.com and Seeking Alpha. He also worked as a Junior Analyst for Kerrisdale Capital, a $300 million New York City-based hedge fund. You can reach him on Twitter at @irbezek.

Article printed from InvestorPlace Media, https://investorplace.com/2020/09/what-to-do-with-luckin-stock-after-its-recent-bounce/.

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