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Why Luckin Coffee Stock, Defying the Downturn, Is Up 10% Today

By Rich Smith – Updated Jun 24, 2020 at 12:56PM

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Could short-sellers be behind it?

What happened

Don't look now, but Luckin Coffee (LKNC.Y 4.58%) is bouncing back. It lost 17% of its market capitalization on Monday, as rumors increased that the company could be delisted by Nasdaq, and then dropped another 12% Tuesday when the exchange issued it a delisting notice, proving those rumors right. But today, Luckin stock is rebounding with a 10.2% gain as of 12:25 p.m. EDT. And it appears to be doing so on no good news.

Rising stock chart with a cat head pictured reads DEAD CAT BOUNCE

Image source: Getty Images.

So what

What's going on here? We've all heard the investing adage to "buy the rumor, sell the news." Well, there may be a converse to that for disaster stories like Luckin, and if so, it might go something like this: "Short the rumor, and close your short when the rumor proves true."

What I suspect we're seeing here today (others may disagree) is a simple case of investors who guessed right that Luckin was in dire straits, and shorted the stock ahead of the Nasdaq delisting notice, now buying back shares for less money than they got when they sold the stocks short.

Now what

If so, this means that today's surge in stock price for Luckin is a temporary side effect of short-sellers exiting their positions, and not something you can expect to last. Once the short-sellers have closed their positions and pocketed some profits, there won't be many motivated buyers left to support the stock price, and Luckin shares will resume their fall.

That's my guess, at least. If you have a different one, feel free to bet it on Motley Fool CAPS.

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

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Stocks Mentioned

Luckin Coffee Inc. Stock Quote
Luckin Coffee Inc.
LKNC.Y
$19.63 (4.58%) $0.86

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