While I wouldn’t have bet on the fraudulent coffee chain after it was delisted from the New York Stock Exchange, I do believe speculators deserve a little credit for taking a chance on a positive settlement.
Luckin Stock Had a Catalyst
As stocks go, Luckin has to be one of the toughest stocks I’ve ever covered over the years.
In 2020, I’ve written about 10 stories about the company, going from a reluctant convert in early January to suggest it was time to turn out the lights in April to my most recent article in November when I said it was time for Luckin Coffee to put up or shut up.
In my most recent article, I was referring to the fact the company hadn’t revealed any financials in over a year, making a bet on its stock a complete crapshoot.
Until the 20-F comes out, I’ll remain skeptical about its business, despite the fact the SEC has let it skate with only a hefty fine.
However, though I couldn’t take a chance on LKNCY considering how little investors knew – and I absolutely couldn’t recommend the stock to even the most speculative of InvestorPlace readers – I have to admit that a catalyst was sitting there in plain sight the entire time this spectacle played out.
What was it?
A positive outcome with U.S. regulators would most assuredly push the stock higher because certainty is what investors hang their hats on. Rumors are nice, but concrete facts are what investors actually value.
Now, with a big fine in the bag, there is a potential end in sight for this debacle.
Compare It to Hertz
It always amazes me when regular investors think they can outmaneuver the professionals.
In June, while talking about how silly it was that investors were buying de-listed shares of JCPenney (OTCMKTS:JCPNQ) after it had entered bankruptcy, I reminded readers that speculators were barking up the wrong tree. That it and Hertz (OTCMKTS:HTZGQ) were dead stocks walking.
“I find it hard to believe that Carl Icahn, a billionaire 15 times over, would take a loss of nearly $1.6 billion by selling his Hertz shares for 72 cents each if he felt there was a chance he could get more than that for the stock he owned,” I wrote on June 11.
This year has brought the kind of speculation not seen in years. I mean, come on, speculating on bankrupt companies. What’s next? Betting on marble races?
Oh, wait, that’s already been done.
Until Luckin Coffee’s financials are revealed, relative to Hertz and JCPenney, it’s still very much a going concern and something worth speculating on.
Where to From Here?
On Dec. 16, the date of the SEC’s news release announcing the settlement, Luckin stock closed trading at $3.74. Two days later, it got as high as $11.11. It has since fallen back under $8.
That’s still the highest level it’s traded since April. If you bet on LKNCY when it was below $4 as a speculative play, you deserve credit for realizing it had a catalyst yet to be played, unlike the two bankrupt companies discussed earlier.
Can the speculators make it two for two?
For this to happen, they must successfully bet that Luckin’s financials have withstood Covid-19 and continued to grow and profit over the past year exclusive of the fraudulently inflated sales numbers.
It will also have to withstand the barrage of civil lawsuits to follow from obtaining almost $900 million in debt and equity financing based on false pretenses.
It won’t be nearly as easy to move Luckin stock from $8 to $16 without some kind of proof that it remains a going concern.
In the meantime, as InvestorPlace’s Chris Markoch recently pointed out, Starbucks (NASDAQ:SBUX) has had a heck of a time keeping the sales flowing in China. There is absolutely no chance that Luckin’s remained unscathed by the country’s economic slowdown.
So, a second speculative success with Luckin ought to be far more elusive. To go back to the well a second time seems like a stretch.
However, if you bet on Luckin stock in the $3s, take a bow. You’ve earned it.
On the date of publication, Will Ashworth did not have (either directly or indirectly) any positions in the securities mentioned in this article.
Will Ashworth has written about investments full-time since 2008. Publications where he’s appeared include InvestorPlace, The Motley Fool Canada, Investopedia, Kiplinger, and several others in both the U.S. and Canada. He particularly enjoys creating model portfolios that stand the test of time. He lives in Halifax, Nova Scotia. At the time of this writing Will Ashworth did not hold a position in any of the aforementioned securities.