Some stocks fall into what might be called the all-or-nothing category. These are usually low-priced stocks that could quickly gain or lose 50% or even 100% of their value. Luckin Coffee (NASDAQ:LK) stock, without a doubt, would fall into this category.
It wasn’t always this way. Not too long ago, LK stock was touted as the “Chinese Starbucks.” Hope was alive and the share price was less volatile. In hindsight, we now know that scandal after scandal would plague Luckin and its shareholders.
Now residing in “Penny Stock Land,” LK stock is volatile and, as some risk-tolerant traders might view it, a ticket to quick gains. It can also be a one-way trip to quick losses, though, as the company’s capacity for bad news seems practically limitless.
Riding the Vicious Cycle
Despite the fact that trading was halted on Luckin’s stock for a month and a half, the average daily volume is now in the tens or even hundreds of millions. What’s drawing so many people into such a dangerous trade?
Most likely, the young Robinhood traders have something to do with it. After all, the stock doesn’t go down every single day. There are breathtaking gains on some days, and it’s natural for people to try their luck and see if they can capture some of that upside.
That’s all fine and good if you take a very small position in the shares and just enjoy the ride. A large position, in contrast, could potentially sap you of your life’s savings in an instant.
This apparently happened to a Reddit poster who bet his savings on LK stock and went “broke” after Luckin launched an internal investigation into “misconduct, including fabricating certain transactions.”
That scandal broke in early April, eventually culminating in an admission that as much as 40% of Luckin’s sales were fabricated. In the wake of this, Luckin COO Liu Jian resigned and CEO Qian Zhiya was axed.
What’s It Worth?
One problem with deciding to invest in such a volatile, news-driven stock is knowing how to value it. How can we effectively attach a valuation to LK stock when an accounting scandal makes it difficult to know what’s real and what’s not?
What we can know with certainty, though, is that LK shares were worth less on June 8 than they had been on the previous trading day. That’s because another scandal had broken at Luckin, which perhaps shouldn’t be surprising at this point.
Reportedly, Chinese authorities found e-mail messages that Luckin Chairman Lu Zhengyao, a.k.a. Charles Lu, allegedly sent to the company’s employees in which he had told them to commit fraudulent acts.
So, where does this leave Luckin’s stakeholders now? It leaves them without leadership: no CEO, no COO and possibly soon no Charles Lu in the chairman’s seat. Without leadership it’s hard to have direction, and without direction it’s hard to know where the stock’s headed.
Or, maybe we could instead view the glass as half-full. Perhaps cleaning house (albeit by force) will allow Luckin to start anew as a better, more transparent company. That’s a nice thought, isn’t it?
But then, wishful thinking isn’t a viable investing strategy. A more cautious approach would be to wait until the dust settles before taking a position, long or short. Until then, most of us would be better off social-distancing ourselves from this ongoing train wreck.
The Takeaway on LK Stock
If you enjoy nothing more than a cup of coffee and a lottery ticket, then LK stock might be right up your alley. For serious investors, though, it’s advisable to avoid a company whose future is unclear, if it exists at all.
David Moadel has provided compelling content – and crossed the occasional line – on behalf of Crush the Street, Market Realist, TalkMarkets, Finom Group, Benzinga, and (of course) InvestorPlace.com. He also serves as the chief analyst and market researcher for Portfolio Wealth Global and hosts the popular financial YouTube channel Looking at the Markets. As of this writing, he did not hold a position in any of the aforementioned securities.