While things have turned around somewhat for China’s Luckin Coffee (OTCMKTS:LKNCY), Luckin stock can hardly be viewed as a buy.
Months after China’s answer to Starbucks (NASDAQ:SBUX) endured an accounting scandal and found its stock delisted from the NASDAQ stock exchange, the company’s share price has more than doubled on the over-the-counter market, rising from $1.39 a share in June to $4.51 per share today.
While that increase might be great for investors who took a position in June, Luckin stock remains too risky a bet for long-term investors to consider buying at this point.
Luckin Stock and Going Private
While Luckin Coffee has ousted the executive team that was in charge when the fraudulent accounting took place, big question marks remain concerning the Chinese company’s financial health and ability to remain a going concern.
Much of the investor interest that has sent Luckin stock higher in recent months can be attributed to short-term investors who are buying shares in hopes that the company will be taken private.
Going private might be the best course of action for Luckin at this point. As a privately held entity, Luckin will avoid scrutiny from investors, regulators and lawmakers, notably in the U.S. where politicians and securities regulators have taken a critical and dim view of Chinese companies with shares listed on American exchanges.
When it comes to going private, some Chinese companies have recently engaged in gamesmanship. A few China-based public companies have gone private with cheap buyouts, only to turn around quickly and undertake an initial public offering (IPO) in China or Hong Kong at much higher valuations.
In this scenario, long-term investors tend to get burned. However, for investors looking to score a quick profit, paying $1.39 a share for Luckin stock when it got delisted this past summer in hopes of getting a little more money per share in a going-private buyout deal might make sense.
Luckin Coffee hasn’t publicly said that it wants to go private, but speculation persists that this would be the best option for the beleaguered company.
New Management
Beyond wild speculation of being taken private, Luckin stockholders are also pinning their hopes on the new management that was installed at the company over the summer.
The company turfed former Chief Executive Officer Jenny Qian and Chief Operating Officer Jian Liu in May as the scope of the accounting scandal became clear. Several members of the company’s board of directors resigned, including the board chair.
These wholesale management changes have given some investors renewed hope that the ship will be righted at Luckin Coffee and that Luckin stock can regain at least part of the 95% in value that it has lost since the spring.
But hopes of a turnaround driven by new management are delusional. While the former Board Chairman, Charles Lu, has left Luckin, he appointed the directors who replaced him and the other Board members on his way out the door.
This has led to media headlines claiming that Lu remains largely in control of the company even though he has technically left. Sadly this kind of corruption and double dealing is too often the norm in China, where scandal appears to be common among publicly traded companies.
At a minimum, there remains a lot of uncertainty and a lack of transparency when it comes to Luckin Coffee, its management and board of directors.
Steer Clear of Luckin Stock
They say that only fools rush in, and that is certainly the case when it comes to investors taking a position in Luckin stock. There remain too many unknowns when it comes to this company to justify purchasing shares.
There are no indications that the fraud and accounting scandals that got Luckin stock delisted in the U.S. have been resolved, and with the company operating entirely in China now, the level of regulatory oversight and transparency needed is sorely lacking.
The bottom line is that investors need to wake up and smell the coffee when it comes to Luckin stock. This company is to be avoided. Case closed.
On the date of publication, Joel Baglole did not have (either directly or indirectly) any positions in the securities mentioned in this article.
