It seems so long ago, but there was a point in time when Luckin Coffee (OTCMKTS:LKNCY) was hailed as the Chinese coffee chain equivalent of Starbucks (NASDAQ:SBUX). And with that, Luckin stock holders were posting pretty decent gains for a while.
In hindsight, it might seem laughable that Zhejiang University of Finance and Economics researchers claimed, “As Luckin Coffee enters the international market, it has become a symbol of globalization, showing China’s coffee brand.”
Of course, it’s easy to mock past predictions. Before all of the scandals and scrutiny, the sky was the limit for Luckin stock. At least, that’s the way it seemed.
A cascade of problems, unfortunately, has culminated in the worst possible outcome for Luckin stock holders. Yet, some folks would dare to buy the shares in light of this. Is this sensible, or self-sabotage?
A Baseless Bounce in Luckin Stock
In the middle of the day on Feb. 8, Luckin stock was absolutely flying. At one point, it was up around 23% and seemed to be approaching $8.70 per share.
This price action should signal good news for the company, right? That would make sense, but we’re living in a time when short-term stock price moves aren’t always driven by reason.
On the prior trading day, Luckin stock had nearly been cut by more than 40%. The share price plunged from $12.82 at the close of Feb. 4 to $7.05 at the Feb. 5 close. On Feb. 10, Luckin stock closed at $7.69.
Not to be morbid (I didn’t make up this term), but the Feb. 8 bounce is likely nothing more than a dead-cat bounce. The fact is, some folks feel the need to buy every dip, even if there’s no positive catalyst to justify the purchase.
A Cascade of Problems
I will now attempt to sum up the whirlwind of significant events regarding Luckin Coffee over the past year. So, here are the bullet points.
- In early April 2020, it was revealed that some of the people at Luckin Coffee had fabricated transactions and inflated the company’s sales figures. Shockingly, Luckin’s internal investigation uncovered 2.2 billion yuan ($307.3 million at the time) worth of fake sales.
- On June 26, the Nasdaq Exchange announced that it would delist Luckin stock three days later. Not long afterwards, traders found the stock on the over-the-counter market instead of on the Nasdaq.
- In July, board chairman and company co-founder Charles Zhengyao Lu was ousted. He was replaced by new Chairman and CEO Jinyi Guo.
- Then, in August, Luckin received resignations from board members Jie Yang and Ying Zeng. Thus, it appeared that Luckin would at least have a fresh lineup at the executive level.
- After all of that, investors awaited the Chinese government’s final judgment against Luckin. Reportedly, Chinese regulators decided to fine Luckin and a number of connected firms a total of 61 million yuan, which equates to $9.45 million today.
- Moreover, Luckin Coffee paid a fine of $190 million to the Securities & Exchange Commission for its revenue overstatements.
‘B’ Is for Bankruptcy, Not Benefit
In what ought to be the final act of this Shakespearean tragedy, Luckin Coffee officially filed for Chapter 15 bankruptcy protection on Feb. 5.
If you can believe it, the company’s press release somehow managed to spin this event in terms of stakeholder benefit:
“The Company is negotiating with its stakeholders regarding the restructuring of the Company’s financial obligations, to strengthen the Company’s balance sheet and enable it to emerge from the Cayman Proceeding as a going concern, for the benefit of all stakeholders.”
I know it’s trendy to trade “bankruptcy stocks,” but I wouldn’t touch this one with a 10-foot pole.
When companies spiral into bankruptcy proceedings, the retail shareholders almost always get the short end of the stick.
In all likelihood, the insiders and institutional-grade investors will get first dibs, while the retail traders will be the last ones to have access to the company’s dwindling value.
The Bottom Line on Luckin Stock
Maybe you’re thinking about buying shares of Luckin based on the “greater fool theory,” which states that you can make money from a bad stock because someone else will inevitably buy it at a higher price.
I say that’s a fool’s game and it’s not worth playing. Stick to companies that are in growth mode, not bankruptcy mode. There are many great stocks to choose from, and Luckin stock’s not one of them.
On the date of publication, David Moadel did not have (either directly or indirectly) any positions in the securities mentioned in this article.