Luckin Coffee (OTCMKTS:LKNCY) — sometimes known as the Chinese coffee chain equivalent of Starbucks (NASDAQ:SBUX) — didn’t reward long-term shareholders in 2020. Suffice it to say that Luckin stock wasn’t among the year’s big winners.
On the other hand, profits were available to bold contrarians who took a long position in Luckin stock at the right time. It took guts, but if you bought the shares at the time of peak pessimism, you’d be in the green now.
The scandals and controversies surrounding Luckin Coffee haven’t faded away. Yet, the trading community does tend to have a short attention span. It’s possible that the sentiment surrounding Luckin stock could turn positive at some point.
And indeed, a recent development suggests that just maybe, the worst is over for Luckin coffee and its stakeholders.
A Closer Look at Luckin Stock
It seems like ages ago now, but Luckin stock used to trade on the Nasdaq stock exchange, which at one point halted trading on LK shares. By the time it was halted, the share price had already declined by 80%.
At that point, some folks started calling Luckin stock a “bankruptcy play” as if it were in the same position and Hertz Global (OTCMKTS:HTZGQ) or Whiting Petroleum (NYSE:WLL). Technically, however, Luckin Coffee doesn’t fall into that category.
Still, the demotion from the Nasdaq to the over-the-counter (OTC) markets was painful for Luckin stock holders. Luckin was classified as a penny stock — defined by the U.S. Securities and Exchange Commission (SEC) as a stock that trades under $5 per share—for the last half of 2020.
Some former Luckin stock bulls abandoned it completely. Yet, dumping one’s shares may have been a hasty move to make. That’s because, from Dec. 16 to Dec. 18, the stock went on a swift run from $3 and change to more than $10.
Hitting Rock Bottom
So, what could possibly have caused Luckin stock to more than double in a matter of days?
In order to get to the bottom of this, we have to rewind the clock a bit. In early 2020, there was an internal investigation which revealed that Luckin COO Jian Liu and a number of employees had fabricated $310 million worth of the company’s transactions.
For regulators and for the company’s stakeholders, it was shocking to consider that $310 million of Luckin Coffee’s reported sales were completely made up.
As a result, every past report of Luckin’s sales and revenue figures was now considered suspicious. For instance, in the third quarter of 2019, Luckin posted an incredible 640% year-over-year increase in revenue, which in retrospect seems difficult to believe.
A Turning Point
With regulators hounding Luckin over accounting irregularities, and with the company’s reputation now damaged, it felt like things couldn’t get any worse.
But again, the point of maximum pessimism can sometimes provide an ideal entry point for courageous contrarian investors.
The U.S. Securities and Commission (SEC) determined that Luckin Coffee had “intentionally and materially overstated its reported revenue and expenses and materially understated its net loss in its publicly disclosed financial statements in 2019.” Following which, it was reported that the reached a settlement with Luckin Coffee wherein the company would agree to pay a $180 million penalty.
Luckin stock doubled in price mainly because investors were relieved that the penalty was manageable. Perhaps the trading community had expected a much bigger dollar amount.
Meanwhile, the Chinese State Administration for Market Regulation only fined Luckin Coffee about $10 million. In total, then, Luckin Coffee so far has to pay out $190 million for what appears to be large-scale fraud.
The Bottom Line
Not long after Luckin Coffee had hit rock bottom, the shareholders were rewarded with a much-needed relief rally.
In the end, it looks like the company’s total penalties might be manageable. That’s great news for Luckin stock holders and could mark the beginning of a comeback for the company and the stock price.
On the date of publication, David Moadel did not have (either directly or indirectly) any positions in the securities mentioned in this article.
