Luckin Coffee (LK) shares fell sharply today after the company announced that it had suspended CFO Jan Liu and several employees reporting to him for misconduct related to “fabricated transactions.”
The company stated, “The information identified at this preliminary stage of the Internal Investigation indicates that the aggregate sales amount associated with the fabricated transactions from the second quarter of 2019 to the fourth quarter of 2019 amount to around RMB2.2 billion.” In U.S. dollars, that amounts to about $310 million—which is greater than the revenues previously reported (apparently falsely) in the third quarter alone.
Carl Delfeld, head analyst of Cabot Global Stocks Explorer, who originally recommended the stock, told his readers this morning, “We will get more information in the coming days and my recommendation is that holders of LK should not sell at these levels and very aggressive investor may wish to buy realizing that the situation is very uncertain,” and that is good advice.
However, given that the stock’s technical pattern is now broken, that it will take time for the truth to come out and that the Chinese government is unlikely to treat this crime lightly, I believe that the stock is now unsuited for the Cabot Stock of the Week portfolio and thus I will attempt to identify a better sell point in the days ahead.