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Why Investors Should Continue to Avoid Luckin Stock

Over the last few weeks, the shares of Luckin Coffee (OTCMKTS:LKNCY) have been hot. In fact, since Sept., Luckin stock has soared from a low of $2.27 to $5.05 as of Friday’s close. If it can break above its double-top resistance at $6.23, it could run higher.

Outside view of a Luckin (LKNCY) shop in Wuhan, China.

Source: Keitma / Shutterstock.com

 

 

There’s no compelling reason to get excited about this stock. The only real news out there is that Chinese regulatory authorities will impose a 61 million yuan penalty against the company after it admitted to fabricating revenue earlier this year.

Granted, the stock looks technically attractive at the moment. But I’d avoid it for the time being. I’m not willing to get burned again by the company.

There’s Still Too Much Uncertainty Facing Luckin Coffee

For one, it’ll take a lot of effort to restore  investors’ trust in Luckin Coffee again.

Remember, the company inflated its sales, then lied about it. The stock was artificially driven higher based on the bogus numbers. After the improprieties were revealed, the stock crashed. Its management was fired, and the NASDAQ gave the coffee stock the boot.

Normally, that would be the end of the line for a company. However, Luckin continues to push forward.  It even recently told CNBC, “We have carried out an overall rectification on the related issues. We will further improve our operations according to related laws and regulations.”

But there’s still a good deal of uncertainty to contend with.

There Are Plenty of Unknowns Facing Luckin

Investors aren’t quite sure how the company is doing. That’s because it hasn’t shared its financial results for quite some time. Without that information, we don’t know if the company is healthy or how it’s doing.  What we do know, according to Investorplace contributor Vince Martin is that it has “cash of $780 million, less debt of $450 million. That leaves about $1.30 per share in cash net of debt.”

We also know that a new chairman of the company, Sean Shao, was elected in Sept.  In addition, the company is still operating stores.  Again, without knowing what the company’s  revenue was in 2019 and 2020 and the possibility of potential legal action against Luckin, I’d avoid Luckin  stock for the time being.

If Luckin Coffee Can Eventually Get Its Act Together, It Could be Attractive

Remember, coffee is becoming a big deal in China.

In fact, as I noted in May:

“We also have to remember that coffee is in high demand in China. For one, China is one of the largest growing markets for the coffee shop industry, according to the Direct China Chamber of Commerce. China also expects to surpass the U.S. as coffee chains’ biggest market. And, according to Statista, revenue in the coffee segment is up to $7.2 billion this year, and could grow at a CAGR of nearly 14% through 2025.”

The Bottom Line on Luckin Stock

In the wake of the scandals, the fines, and plenty of burned investors, time will tell if Luckin can get its act together. But it has to rebuild investors’ trust. It needs to share its revenue figures for the last two years, and it needs to prove to investors it won’t pull another stunt.

While the stock may appear to be technically attractive, I’d avoid it for the time being. You can find far better opportunity in other coffee stocks like Starbucks (NASDAQ:SBUX).

In short, investors need to wake up and smell the coffee, since Luckin’s beans have been roasted.

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

Ian Cooper, an InvestorPlace.com contributor, has been analyzing stocks and options for web-based advisories since 1999. As of this writing, Ian Cooper did not hold a position in any of the aforementioned securities.


Article printed from InvestorPlace Media, https://investorplace.com/2020/11/why-investors-should-continue-to-avoid-luckin-stock/.

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