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Why Luckin Coffee Stock Rocketed Higher Today

By Joe Tenebruso – Jun 5, 2020 at 4:50PM

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The Chinese coffeehouse chain has nearly quadrupled from its recent lows.

What happened

Shares of Luckin Coffee (LKNC.Y 0.55%) surged on Friday, continuing the stock's incredible ascent off its lows. By the close of trading, Luckin's stock was up 36% after rising as much as 67.7% earlier in the day.

So what

The Chinese coffeehouse chain is besieged by scandal. The company disclosed on April 2 that it had fabricated as much as $310 million in sales from the second quarter of 2019 to the fourth quarter. On May 12, it terminated its CEO and chief operating officer for their alleged roles in the accounting scandal. 

The news would only get worse. On May 19, Luckin disclosed that it received a delisting notice from Nasdaq, placing its stock's ability to continue trading on the stock market in question. Luckin's stock would go on to hit an all-time low of $1.33 on May 22, representing a brutal decline of more than 97% from its all-time high back in January. 

A dollar bill folded in the shape of a stock chart that rises then falls then rises again.

Luckin Coffee's stock soared on Friday. Image source: Getty Images.

However, Luckin's share price has rebounded nearly 300% from its lows in recent days. Other than rumors of asset sales and a possible takeover by a larger company, the gains have come on relatively little news.

Now what

It's possible that short sellers are closing out their positions, which requires them to buy shares. This can accelerate upward moves in the share price of heavily shorted stocks, such as Luckin, particularly when highly leveraged traders are forced to close out their short positions due to unexpectedly large upward price swings.

It's also possible that speculators are buying Luckin's stock in the hopes that it can eventually recover from the accounting scandal. This is a risky bet as the coffeehouse chain was unprofitable before cooking the books -- and its profitability metrics are likely to look a lot worse once we know the full extent of its accounting shenanigans.

Regardless of what you believe is driving Luckin Coffee's recent gains, one thing is nearly certain: Its stock price is likely to remain highly volatile in the days and weeks ahead.

Joe Tenebruso has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Luckin Coffee Inc. The Motley Fool recommends Nasdaq. The Motley Fool has a disclosure policy.

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