What's Behind The Luckin Coffee Rally?
Scandal-stained Luckin Coffee Inc – ADR (NASDAQ: LK), which saw its shares slump to a low of $1.33 May 22 on delisting risk, has seen strong momentum this week.
Touted as a threat to Starbucks Corporation (NASDAQ: SBUX) in China, the coffee retailer was progressing along fine until it was unearthed in early April that its COO was fudging transactions over the past year.
On April 2, when the news broke, the stock lost about 75% of its market cap in a single session and plunged to $6.40. The stock moved downhill from there for the next few sessions before the Nasdaq halted trading on April 7.
The stock resumed trading May 20 and continued to remain under pressure as traders reacted to the delisting notice served by the Nasdaq in the interim.
Luckin's stock, which was trading at $2-plus levels for much of the time after trading was resumed, soared about 57% Thursday before ending at $4.05. Intraday, the stock touched a high of $4.94.
The rally is extending into Friday's session. The stock was up 46.64% at $5.94 at the time of publication.
What is noteworthy is the abnormally high trading volume. On Thursday, 29.03 million shares exchanged hands, and the volume was twice as high Friday.
The recent spike in shares may have been due to bargain hunting amid the stock's plunge.
Although number of shorted shares has declined from April, it still is at a relatively high 37.73 million as of May 15, representing 14.91% of the outstanding shares. The short ratio as of May 15 was at 1.92.
With bargain hunters picking up the stock, some of the short bets may have unwound, creating additional strength.
Luckin has a long winding route toward regaining investor confidence in order for the shares to see a sustainable rebound. Until then, investors should trade any rebound with caution.
