What's Behind The Luckin Coffee Rally?

Scandal-stained Luckin Coffee Inc – ADR LK, which saw its shares slump to a low of $1.33 May 22 on delisting risk, has seen strong momentum this week.

Accounting Scandal Craters Stock

Touted as a threat to Starbucks Corporation 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 Rally

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, 290.3 million shares exchanged hands. On Friday, volume continued to be robust, with about 129.95 million shares changing hands. The stock's average trading volume is 29.76 million shares. 

What's Driving Luckin Shares Higher 

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.

Benzinga's Take

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.

Do you agree with this take? Email feedback@benzinga.com with your thoughts.

Related Link:

Market Shrugs Off Potential Delisting Of Chinese Stocks

Luckin Coffee Short Sellers Make $1.1B In Profits As Shares Continue Plummet

Photo by N509FZ via Wikimedia.