If you’re interested in gambling on Luckin Coffee (OTCMKTS:LKNCY), you cannot ignore the fact that it’s a Chinese company. And because of that, you can’t ignore the negative image that China brought on itself. That’s not political talk, by the way. Rather, you can consult the Pew Research Center, which revealed that many countries across the globe have an unfavorable view of the Asian economic powerhouse. But is that enough to hurt Luckin stock?
On many levels, the answer is a resounding yes. In the U.S., 73% of Americans have an unfavorable view of China, while 84% believe that the country did a bad job handling the novel coronavirus. True, most of the negativity is concentrated among older demographics. But no adult age bracket features a favorable view of China. This is significant for Chinese investments like Luckin stock because younger people tend to be more liberal or progressive.
If I may be blunt, deep down, there’s an issue of karma involved. Frankly, it doesn’t seem right that China gets to have an economic recovery – where the novel coronavirus originated – while countries like the U.S. must suffer a terrifying second wave. Add to that the issues involved with the U.S.-China trade war. The Trump administration prosecuted this aggressively because of intellectual property theft. And, you can see how even left-leaning individuals have no love for China.
That’s not to say that I completely agree with how President Trump addressed the Covid-19 pandemic. By constantly rousing anti-China sentiment, this conveniently ignores that U.S. policymakers sold out to the Chinese over decades. I mean, then-Sen. John F. Kennedy warned us about potential Chinese dominance in Asia when he debated then Vice President Richard Nixon.
Therefore, we must bring some context in our discussions about China. Nevertheless, the rawness of Covid-19’s impact, along with China’s failures to contain the outbreak, casts a poor light on Luckin stock. Something about benefiting Chinese companies, especially when a quarter of young Americans may be contemplating suicide because of the pandemic’s broad impact, doesn’t seem right.
Complicated Narrative for Luckin Stock
Now, the Chinese communist party may be many things, but they’re not stupid. If Trump won a second term, that would pose challenges for China-based investments like Luckin stock. However, barring extremely unusual and unlikely events, President-elect Joe Biden will take over. But that alone isn’t fundamentally enough to provide cover for LKNCY.
Mostly, this is because profitability potential isn’t the only factor that investors consider. Rather, as multiple academic studies have pointed out, trust is a crucial determinant for whether an individual bothers investing at all. According to a research paper by Yuna Liu at the University West in Trollhattan, Sweden:
…lack of trust is an important factor in explaining the limited participation puzzle on stock market, since the investor’ decision not only depends on an assessment of the risk-return tradeoff given the existing data, but also on an act of faith (trust) that the data in possession are reliable and that the overall system is fair. Consequently, trust influences the subjective expected return of stocks and less trusting investors hold fewer stocks.
With Luckin stock, you probably couldn’t find a more high-profile example of an untrustworthy investment. Therefore, the bear case is an obvious one. But it’s just not that simple.
In October, I referenced that extreme patriotism has taken over China. According to a Wall Street Journal report, many angry mobs online have advocated for violence toward those perceived as being disloyal to China. Therefore, Chinese investors may view it as an act of patriotism to invest in Luckin stock. Even people who are not that extreme may eschew western brands like Starbucks (NASDAQ:SBUX) for local businesses.
Thus, I don’t disagree with InvestorPlace contributor Nicolas Chahine, who stated that LKNCY stock could grind its way out of this hole. Interestingly, Chahine notes that a bullish technical signal – what most analysts would refer to as a pennant formation – has developed in the charts, signaling a robust breakout ahead.
A Near-Term Trade with Longer-Term Uncertainty
What really caught my eye about Chahine’s analysis is that I used the same justification for being bullish on DraftKings (NASDAQ:DKNG) back in August. DKNG formed a bullish pennant formation and despite my concerns about the coronavirus pandemic, this signal is usually reliable.
You know what? Shares indeed bounced higher. And the same could very well happen for Luckin stock in spite of the aforementioned negative factors.
But that shouldn’t be an excuse for holding onto LKNCY indefinitely. As we saw with DraftKings, after hitting a peak, DKNG’s price action turned volatile. Definitely, a risk exists that a similar outcome awaits Luckin. If the global economy weakens because of surging coronavirus cases, that’s not going to be helpful for China.
Bottom line, I see Luckin stock moving higher on a technical basis. But you should consider an exit plan if you get the bump up. The longer-term trajectory is far from certain.
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.