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Why Luckin Coffee Stock Surged 50% Tuesday

By Joe Tenebruso - Updated May 27, 2020 at 8:49AM

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Rumors of asset sales could be spiking investors' interest in the beleaguered Chinese coffee-shop chain.

What happened

Shares of Luckin Coffee (LKNC.Y 3.66%) soared on Tuesday, following heavy losses in recent days. As of 3:30 p.m. EDT, Luckin's stock was up more than 50%.

So what

Even after today's gains, Luckin Coffee's stock is still down more than 95% from the highs it reached in January. The Chinese coffeehouse chain's brutal decline came after it said on April 2 that members of its leadership team had fabricated as much as $300 million in sales transactions.

In the weeks that followed, Luckin went on to fire its CEO Jenny Zhiya Qian and chief operating officer Jian Liu, due to their alleged roles in the accounting scandal. The company also received a delisting notice from Nasdaq on May 19, placing its stock's ability to continue to trade on the exchange in question.

However, Reuters reported on May 24 that Yum China Holdings and other restaurant companies could be interested in acquiring some of Luckin Coffee's assets, such as its app and customer data. It's possible that the news contributed to the sharp rise in Luckin's share price on Tuesday.

A person points to an upward-sloping line that's risen above a flat line.

Luckin Coffee's stock rose sharply on May 26. Image source: Getty Images.

Now what

Despite today's rally, Luckin Coffee remains a high-risk stock. Even if the beleaguered coffee company is able to sell off some of its assets, it may not be enough to offset what could turn out to be massive operational losses once the full extent of its accounting shenanigans is known. Thus, investors could still suffer sizable losses from this point forward, up to and including a complete loss of capital should Luckin Coffee descend into bankruptcy.

At this point, most investors would be better served by staying clear of Luckin Coffee's shares. There are far better and less risky companies to choose among.

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