After all the events that transpired this year with Luckin Coffee (OTCMKTS:LKNCY), this can only be a speculative bet. Luckin stock came to market in 2019 and after an iffy start, rallied 170%. Its buzz only lasted for about a week before it started its descent.
What unfolded thereafter is what you read about in books. The once-Starbucks (NASDAQ:SBUX) slayer cut its own head by mistake. Management committed an egregious unforced error which created this opportunity today.
Coming into 2020, Luckin seemed like it was a legitimate foe to the mighty SBUX. It was surprising how a company this young rose this fast to face the champ. In hindsight, it was easy for them since it turns out they were flat out cheating. The scandal that ensued crippled the stock completely.
The investors were the losers and those who had believed in it faced a wipe-out. I got off easy back then. I only had a few calls with it because I tried to catch the falling knife too soon.
Today we consider the chart once more to see if there is anything left to salvage from Luckin stock. We are of course looking at the OTC market where it now lives. Wall Street forgives a lot, but not out-and-out fraud. Luckin will have to work very hard to get out of stock purgatory.
In cases like these I rely heavily on the technicals. The information in the charts is extremely valuable and has no emotions. I can consider lines without needing to draw on sentiment. Most of the trading is done by machines so it is a collection of self-fulfilling prophecies. Ignoring them would be opting to refuse a powerful tool of the trade.
Luckin Stock ‘Fundamentals’
According to the company, the fraud started in Q2 of 2019 by Jian Liu, the COO. They have since squashed it and corralled the posse that helped him commit the infractions. The company will have to deal with the blow-back for years.
I can imagine investors suing for reparations from the pain they endured. The company claims to have ample cash to deal with the costs. This remains an opaque financial data, so we will have to trust they have unverified $750 million.
We were fooled into thinking that Luckin had a competitive advantage being the local favorite. I chalked up the sales success to the fact that patriotism put SBUX at a disadvantage. They also introduced the concept of sales kiosks which sounded strange. I’ve always believed that peoples’ love for routine was a big part of the Starbucks success. My friends, who are devotees, are so because they enjoy the morning stop at “their” Starbucks. It wouldn’t be the same if it was a vending machine.
Then there was the unfair competition tactics. Luckin was pretty much giving the business away. I made note of it in my January write up. Such an unfair advantage could not last. They can’t give away the business too long before they go broke.
Then came the massive bust and now it’s a whole new ballgame. Management has since pinned the blame and is trying to move on from it. They are going to be under the microscope, so from that sense the fraud worry is off the table.
The Chart Suggests a Move Is Coming
Technically the range is tightening to a point where it needs to explode. The direction of the move is still unclear but it’s coming. The major upside trigger is if the Luckin stock bulls can take it above $6.40 where it failed recently.
But the real battle is $1 closer than that. The buyers are in charge since it is finding footing on dips. Ever since the June swoon, it has been setting higher-lows. If this continues then the odds of a breakout are good. Once above the triggers we noted, it will face at least two lines of resistance. One is at $6.80 and the other at $7.50 per share. The biggest test for the bulls will be $10, just below the massive gap that crushed it in April.
Pandemic or not, this stock was headed for disaster due to an unforced error from within. But the upswing momentum from the virus crisis recovery could also levitate Luckin stock in its bid to get back to the big show.
Being part of the OTC market makes it by definition a speculative bet. Owning these shares for the long haul makes sense for investors who are betting on a miracle comeback. We don’t have a lot of transparency here into their business, but as they say: No risk, no reward.
On the date of publication, Nicolas Chahine did not have (either directly or indirectly) any positions in the securities mentioned in this article.
Nicolas Chahine is the managing director of SellSpreads.com.