3 Unfortunate Reasons Why Luckin Stock Will Move Higher

Under most logical frameworks, disgraced Luckin Coffee (OTCMKTS:LKNCY) should be nowhere near the number “nine,” unless that number referred to cents. Instead, Luckin stock is currently trading above $9, which is a staggeringly dubious achievement. Sure, the move up there is impressive but it’s hard for me to give accolades to a cheating organization.

close up luckin coffee's logo coffee brand in Shanghai, June 2019.
Source: NewsToday / Shutterstock.com

By now, you’ve probably read every angle there is to read regarding Luckin stock and the accounting scandal. Some of you might be encouraging that the underlying company got off quite lightly for its racket. In my view, I still think what Luckin did was inexcusable. Management lied to its shareholders about its growth, which is a massive problem because LKNCY is a growth stock.

More importantly, trust is a sacred concept in the capital markets. Various academic research indicates that trust is vital in investing, particularly if a company is trying to secure funds for its business. Naturally, you’d assume that losing such trust, as Luckin did, would be devastating. Therefore, I’ve been very critical about Luckin stock, as have my fellow InvestorPlace contributors.

However, it’s also important to realize that we’re living in a new generational paradigm. You’d hope that some of the values and principles from prior generations would have been carried forward by younger demographics. But the evidence suggests otherwise.

For instance, according to the Federal Trade Commission, millennials are “25% more likely to report losing money to fraud than people 40 and over generally, and much more likely to report a loss on certain types of fraud.”

To me, this indicates that millennials are too trusting and willing to give the benefit of the doubt. And that may be exactly why they find themselves being defrauded at an alarming rate — the benefit of the flippin’ doubt!

Anyway, it’s unfortunate but it’s time to rethink Luckin stock. Don’t get me wrong. It will always be associated with a no-good cheating company. But if nobody cares, there’s no point belaboring an “irrelevant” argument.

It Pays to Be in Luckin Stock

I’ve been speaking about this situation over the last few weeks and it’s important to understand this as the basis for why we see a disconnect between record-breaking Wall Street and the pain on Main Street. It comes down to negative interest rates.

On paper, the benchmark yield is very low but in positive territory. But when you back out the metric for inflation, what you’re left with is the real interest rate, which has gone below zero.

Now, negative rates represent a truly unusual dynamic. In simple terms, it means that you pay the bank for holding your money, while the bank pays you to take out a loan. I break it down this way: staying in cash penalizes you.

Well, nobody wants to be penalized for simply holding cash. Therefore, the smart money has been moving to put its cash to work, and equities are one avenue of interest. Indeed, the much-discussed Robinhood traders may have been acting very rationally.

Further, the possibility of Americans receiving future stimulus checks will add pressure to this unusual monetary environment. Bottom line, money is dirt cheap right now. And some are making it grow — because again, you’re losing value by holding dollars — by moving to speculative assets like Luckin stock.

LKNCY Gives a Technical Bullish ‘Tell’

When delivering a dry, sarcastic joke, you’ve got to provide a physical “tell” to alert your target audience to your upcoming attempt at humor. Otherwise, without the tell, you end up looking defensive, standoffish, or British.

In a similar vein, I believe Luckin stock is giving a tell that it will eventually trade between $10 at the low end and $20 at the upper range. Here’s my reasoning.

Since the revelation of the accounting fraud and its subsequent green light to resume trading, Luckin stock quickly revealed that it won’t go gently into that good night. Oh no, LKNCY popped briefly above $5, a strong tell that it won’t be below that mark indefinitely.

Luckin stock's opportunity zone
Click to Enlarge
Source: Chart by Josh Enomoto

Sure enough, it blew past $5 once we knew that management of the Chinese coffee purveyor was only going to get a slap on the wrist. That sent shares to roughly where it is today, around $9.

But before its self-manufactured crisis, Luckin stock briefly flirted with $50. That wasn’t sustainable, though, as that price point represented the peak of a bearish head-and-shoulders pattern. At the same time, during the pre-fraud years, LKNCY did demonstrate stability around $20.

From my perspective, the recovery trek is clearly laid out: LKNCY will trade somewhere between $10 to $20.

Chinese Nationalism Makes for Great Coffee

Obviously, former President Trump did not take the novel coronavirus pandemic too well. Throughout his speeches and tweets, it was evident that he blamed China for costing him the 2020 election. In a sense, he’s right. If the coronavirus never happened or if the Chinese government alerted the international community to the problem, Joe Biden would still be in his basement.

But it’s not just the Mar-a-Lago returnee who is bitter. The Chinese are none too happy about the global finger pointing. However, their government is happy about stirring nationalistic fervor. As The Wall Street Journal recently reported, Chinese tensions with the U.S. reached a fever-pitch last year.

Certainly, it’s possible that the new Biden administration may ease the friction. Or it might exacerbate it. There’s no guarantee since Biden knows that Republicans don’t trust him. Being too conciliatory to the Chinese has never been a good move, pandemic or no pandemic.

In the meantime, the rancor benefits Luckin stock in that the underlying company can benefit from patriotic purchases. And this will also take away revenue from western competitors like Starbucks (NASDAQ:SBUX).

It’s cynical but that’s Luckin Coffee in a nutshell for you.

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.

Article printed from InvestorPlace Media, https://investorplace.com/2021/01/3-sad-reasons-why-luckin-stock-will-move-higher/.

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