The Bull and Bear Case Over Cheating Luckin Coffee

Just like the disgusting Houston Astros, Luckin Coffee (OTCMKTS:LKNCY) rightfully earned the disdain of the global investment community. As I’ve stated before, Luckin lied and portfolios died. While you can make the argument that the fraud wasn’t total fabrication – like the Astros, they didn’t have to cheat, which makes the cheating even worse – people don’t like to be lied to. That’s just the bottom line, which doesn’t suit Luckin stock.

A Luckin (LKNCY) coffee cup on a table in a Luckin shop with the logo on the wall behind.
Source: Ploy Makkason / Shutterstock.com

Nevertheless, I couldn’t help but notice that the Astro-nots got worryingly close to making it to Major League Baseball’s World Series. Though this is outrageous on many levels, the club used the hate against them as motivation to win a title cleanly. Of course, that would be fine … unless you legitimately violated the rules, thereby causing that hate in the first place. Still, you got to admit that it worked.

On the other hand, because the Astros didn’t make it to the big show, you also have justification to avoid cheating organizations. As it turns out, cheaters never prosper. And so, despite the alluring discount on Luckin stock, you might be getting more than you bargained for in the end.

But is there a chance that Luckin stock can break out for a quick profit? Recently, LKNCY has been on the move. Thanks to the law of small numbers, speculators have finally been rewarded for their contrarian thinking.

To answer bluntly, yes, it’s possible that Luckin stock could be one of the breakout stars of 2020, setting up an absurd rebound into next year. Recent events suggest that in spite of the distastefulness, LKNCY could be a winner. But the bearish case is also valid, and I want to give you both arguments, beginning with the optimistic outlook.

Rising Nationalism Helps Luckin Stock

China is a very proud country and an opportunistic one. That’s why it doesn’t mind in the least to flex its muscles, drawing contempt from western nations. And this pride is also why communism flourishes there and why Chinese government propaganda is so effective: Fill people’s minds with ego-boosting narratives and you will have a loyal army of one-billion-plus strong.

Over the years, however, the hedonism of the U.S. and western cultures began infiltrating Chinese hearts and minds. After icy relations during the Cold War, many Chinese, particularly the young, found that capitalism is good. Hence, the popularity and consumption of western brands, including Luckin competitors McDonald’s (NYSE:MCD) and Starbucks (NASDAQ:SBUX).

Of course, the U.S.-China trade war put an end to warming relations. However, not all Chinese consumers blamed American imperialism. A great many criticized their own government, leading to mass social media manipulation. Frankly, if it weren’t for the novel coronavirus, China may be on its heels.

Instead, the crisis and more specifically the international blame cast on the country has emboldened the Chinese. Taking a strategy right off the Houston Astros’ playbook, China has been able to expertly craft a we-against-the-world narrative. In the same way that we find the lack of contrition from the Astros disgusting, so it is with communist China.

Not only that, Chinese nationalism has gone through the roof. Here’s a quick excerpt from the Wall Street Journal that really tells the entire story in three paragraphs:

Angry mobs online have swarmed any criticism of China’s leaders or a perceived lack of loyalty to the country. Targets are being harassed and silenced. Some have lost their jobs.

Among those who have been attacked this year are public figures who have raised questions about officials’ early handling of the coronavirus. They include a writer from Wuhan named Fang Fang, who wrote online about the struggles of local residents and accused government officials of being slow to respond to the outbreak.

Thousands of Chinese internet users called her a traitor. An anonymously written poster hung at a Wuhan bus station told her to “shave your head or kill yourself to atone for your sins against the people”—and a photo of it spread widely online. A famous tai chi master called on allies to assault her, using their “clenched fists of justice.”

Can you imagine if the Astros threatened to hand their critics clenched fists of justice? I mention these things because the idea that Chinese consumers will eschew Starbucks for Luckin isn’t that far-fetched when you consider the current geopolitical context. Therefore, you might want to look into Luckin stock, if you can’t parry those fists, that is.

China Might Be Lying About Its Covid-19 Cases

Early on, many experts cast doubt on China’s coronavirus case statistics, noting some statistical abnormalities. Interestingly, one of the methodologies to cast light on this manipulation was Benford’s Law. The Journal of Accountancy provides an excellent article regarding this concept, of which a brief excerpt is below:

In 2015, Atlanta’s Six Flags White Water theme park opened a new 10-story slide called the Dive Bomber. The ride begins with a virtual free fall nearly straight down before it gradually levels out toward the bottom. Most people who look at the Dive Bomber see a thrill ride—one they may or may not want to experience. CPAs who gaze upon the Dive Bomber may see something else—an image they could possibly use to detect and prevent fraud.

What could a water slide possibly have to do with fighting fraud? The answer lies not in the nature of the slide, but in its shape. The Dive Bomber’s curve closely matches the curve Frank Benford discovered in 1938 that depicts mathematical expectations related to naturally occurring (or nonfabricated) numbers.

In a nutshell, in a large set of numerical non-manipulated data, numbers that begin with “1” should occur the most frequently, around 30.1% of the time. Subsequently, the numbers “2” through “9” should progressively decline in frequency. Charting the results, you have a declining curve, colloquially known as the Benford curve.

Well, a report from the University of Oxford and Said Business School noted that “Chinese data on Covid-19 cases manipulated in early stages of pandemic, but accurate since.”

Oh really?

I had to check the data for myself and I was unsurprised to find some abnormalities. When you look at new daily coronavirus cases from the Chinese Center for Disease Control and Prevention, running a Benford analysis reveals a declining curve, with the “1” coming up most frequently. But because this number came up 64% of the time, I got curious.

Starting from March, I noticed an abnormal number of new coronavirus cases coming in at a perfect “100.” Not 106, nor 97 but 100. Exactly 100. And because there were so many “100” entries, it skewed the Benford analysis to look like a legitimate curve.

So, I did what any analyst would do – I ran a Benford analysis from Jan. 20 to Feb. 29. And that resulted in the number “2” coming up most frequently in the data set, which may suggest that China is not only manipulating its data, the government has been accelerating its manipulation.

Benford curve analysis for China vs. Other Nations
Click to Enlarge
Source: Chart by Josh Enomoto

On this note, it should be pointed out that China’s Benford trend looks awfully suspect when stacked up against other nations’ Benford curves. I’ll let you decide but to me, Chinese case numbers look suspicious.

If you’re wondering what China might be hiding, it’s that its coronavirus situation may be worse than advertised. But if the government revealed that, this of course would send waves of fear throughout the Chinese economy. That can’t happen because the New York Times has revealed that Chinese exports are surging.

Any dent to this narrative could spell much ugliness for China. Obviously, that wouldn’t be helpful to Luckin stock.

A Possible Play on the Election

One factor that could add more clarity to Luckin stock is our political cycle. With only days remaining until Nov. 3, I find it very interesting that LKNCY is charting what I believe to be a bullish pennant formation. If I’m interpreting this correctly, Wall Street anticipates a Joe Biden victory.

Personally, I’m leaning that way as well. But what I’ve learned is that you cannot count President Donald Trump out. Although it’s not reflected in the polls, his enthusiasm is through the roof. When I hear some of his ardent supporters say that they’ll die for the man, I believe it.

As well, Trump voters may indeed be the silent majority. I can’t help but notice that when I discuss topics about racial inequality, those subjects are not popular whatsoever, even though such discussions are incredibly relevant. Therefore, the sheer volume of silent white conservative voters may overwhelm the Electoral College.

So, the best I can say about Luckin stock is that it’s a gamble. The good news is, the positive factors suggest that LKNCY has a higher probability of rising. But the risk of course is that we all know about probabilities from 2016.

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

A former senior business analyst for Sony Electronics, Josh Enomoto has helped broker major contracts with Fortune Global 500 companies. Over the past several years, he has delivered unique, critical insights for the investment markets, as well as various other industries including legal, construction management, and healthcare.


Article printed from InvestorPlace Media, https://investorplace.com/2020/10/bull-bear-case-for-cheating-luckin-stock/.

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