In a column about Chinese coffee retailer Luckin (NASDAQ:LK) from on Jan. 23, I urged investors to “wait for the coronavirus to be contained before buying Luckin’s shares.” I added that “people thinking about buying the stock for the first time should at least wait until the (Chinese) New Year holiday is over or until Luckin has dropped to around $45. Cautious investors may want to wait for more signs that the coronavirus has been contained before purchasing their first shares of Luckin stock.” Finally, I advised investors whose shares of Luckin had doubled or tripled to sell their position and buy LK stock on pullbacks.
That generally turned out to be pretty good advice, although Luckin wound up dropping way below $45. LK stock ended up reaching a recent low of around $30.65 on Feb. 3, just after the end of the Chinese New Year.
However, the containment of coronavirus is still up in the air, but will likely weaken in coming months. Meanwhile, Luckin’s positive catalysts remain largely intact, and LK stock still trading well below its 52-week high of $51.38.
As a result, now is a good time to snap up Luckin’s shares.
The Coronavirus Outbreak Is Likely to Ebb
Many of China’s workers are returning to their jobs this week, despite the coronavirus outbreak. That should be good for Luckin, since people tend to drink more coffee when they’re working.
Moreover, as I’ve noted in previous columns, there’s good reason to believe that one of Gilead’s (NASDAQ:GILD) drugs can cure the new virus. And, experts have said that coronavirus is likely to weaken when the weather gets warmer. Furthermore, there have recently been signs that the new virus’ spread has peaked.
Meanwhile, Luckin has attributes that should enable it to withstand the impact of the new virus more than most retail businesses — and certainly more than its main competitor Starbucks (NASDAQ:SBUX). Specifically, Luckin’s new vending machines allow consumers to buy products without interacting with any other people. And, even with its stores, Luckin mostly sells coffee to go — making it a less “social” business than Starbucks.
That business model also makes Luckin less social than most other retailers. And as a result, consumers who want to avoid interacting with others are not as likely to avoid Luckin as, say, a crowded eat-in restaurant or a packed shopping mall.
Overall, these are good things for the company and LK stock.
Investors Should Ignore the Muddy Waters Report
Another reason for the weakness of LK stock in recent weeks was a report posted by short seller Muddy Waters. Written by an anonymous source, the report asserts that videos show that Luckin has been falsifying its sales data.
But since the report was anonymous, there’s a good chance that it was compiled by an untrustworthy source who is shorting Luckin’s shares and would not hesitate to use inaccurate data.
Moreover, Citron defended Luckin against the allegations. Citron also reported that it owns LK stock, and said that the shares could reach $60. Given all of these circumstances, investors should ignore the Muddy Waters report.
The Bottom Line on LK Stock
Collectively, Luckin’s positive trends discussed above remain intact. Moreover, the company has characteristics that should prevent its results from weakening tremendously during the coronavirus outbreak.
And, after the outbreak subsides, Luckin’s strong, positive catalysts should strengthen — causing shares of LK stock to resume their rally.
As of this writing, Larry Ramer owned shares of Luckin stock.