Beat Billions got a couple of things correct about how Luckin Coffee stock (LK) would trade once the trading ban is lifted. You can find these predictions in this article that we published on May 20.
- Our prediction for a significant drop in the share price in the first couple of trading sessions was pinpoint accurate.
- We warned investors to never rule out the possibility of a sharp rebound in the stock price, which proved to be accurate as well.
Now that shares are well above the price of $4.39 at the time Nasdaq imposed the trading restriction, we believe it’s time for investors to start distancing themselves from Luckin Coffee stock in anticipation of a “second wave” of a massive decline in the stock price.
Here is why
First, Nasdaq is working on the delisting process of Luckin Coffee stock as we write this article. The bad news might hit the market anytime now, and this is not going to be entertained by market participants. The recent price action is surprising in the sense that investors have suddenly forgotten this negative development. The last time we checked, a company that gets delisted from a major index suffers heavily in the first few trading sessions on the OTC market. In case you’re a long-term investor who is not in Luckin Coffee to make some quick bucks, well, you can altogether forget about this pending negative news but we believe that the majority of Luckin Coffee investors are short-term oriented. At least, that is what we can infer from the recent market movements.
Second, there is a very real possibility of every Chinese stock listed on American markets getting hammered anytime in the next few weeks if the U.S. government makes another move to delist Chinese stocks that are not compliant with the approved accounting standards. In any case, Luckin’s accounting scandal is one of the primary reasons for the regulators to consider such a bold move. We do not plan to write extensively about this pending risk here in this article, but we want to remind investors that this risk is well and truly at play. It’s already proven to be a good decision to never underestimate what Mr. President might do to hurt China. Right now, trade tensions are once again escalating and publicly listed Chinese stocks are in the firing line.
Third, Luckin Coffee is yet to adjust the reported numbers for the previous year, despite accepting the fraudulent reporting and firing top executives who were deemed as responsible for this malpractice. Even though some investors are of the opinion that revised financials will boost the market sentiment toward Luckin, we believe the opposite will happen. The filing of revised financial statements will only serve as a reminder of Luckin Coffee’s horrible past, and this might trigger a sell-off the same way it has done with many other companies that had to file restated financials. Think about Kraft Heinz (KHC) for example.
Takeaway
Getting it right two weeks ago does not guarantee that Beat Billions will get it right this time around as well. Our research process is based on an analysis of fundamentals and market sentiment, and the data that we have in hand create substantial doubt about the performance of Luckin Coffee stock in the next few weeks and months. We believe the future is going to be bumpy and difficult, and there are better plays out there to risk your investment capital. The prudent thing to do with Luckin Coffee stock, therefore, would be to book the profits and steer clear until we have more data to assess the outlook for the company.
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