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Sydnee Gatewood
Sydnee Gatewood
Articles (2473) 

Steve Mandel’s Lone Pine Spills Out of Luckin Coffee After Fabricated Sales Revealed

The company announced last week that its COO had faked 2019 sales numbers

In the wake of Luckin Coffee Inc. (LK) revealing that its former chief operating officer fabricated 2019 sales last week, Steve Mandel (Trades, Portfolio)’s Lone Pine Capital disclosed it exited its stake in the company.

The Greenwich, Connecticut-based hedge fund picks stocks using a long-short strategy that focuses on bottom-up, fundamental analysis. Combining growth and value strategies, the firm, whose founder was a former “tiger cub” of Julian Robertson (TradesPortfolio), is known to not hold positions for very long.

According to GuruFocus Real-Time Picks, a Premium feature, Mandel’s firm dumped all 6.06 million shares of the Chinese coffee company on April 2, which was the same day the news broke. The trade had an impact of -1.27% on the equity portfolio. The stock traded for an average price of $6.40 per share.

GuruFocus estimates Lone Pine has lost 75% on the investment since establishing it in the fourth quarter of 2019, when shares traded for an average price of $25.62 each.

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The Beijing-based coffee chain, which is smaller and more tech-based than its larger competitor Starbucks Corp. (NASDAQ:SBUX), has a $1.1 billion market cap; its shares were trading around $4.39 on Tuesday with a price-book ratio of 1.17 and a price-sales ratio of 1.87.

GuruFocus estimates the stock has tumbled more than 80% year to date.

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Luckin reported that an internal investigation found its former COO, Jian Liu, and some of the employees who worked under him had fabricated 2019 sales by approximately 2.2 billion yuan ($310 million). In a statement, the company noted that “certain costs and expenses were also substantially inflated” as a result of the fabricated transactions, which occurred from the second quarter through the fourth quarter of the year. It also noted that as the investigation continues, more concrete numbers will emerge.

While Luckin’s previous earnings results and guidance are no longer reliable, GuruFocus has rated its financial strength 7 out of 10. The Altman Z-Score of 2.14, however, indicates the company is under some financial pressure as its Sloan ratio suggests it has poor earnings quality.

Weighed down by negative margins and returns that underperform a majority of competitors, the coffee company’s profitability fared even worse with a 1 out of 10 rating.

Of the remaining gurus invested in Luckin, Steven Cohen (Trades, Portfolio) has the largest stake with 0.45% of outstanding shares. Philippe Laffont (Trades, Portfolio) and Paul Tudor Jones (Trades, Portfolio) are also shareholders.

Portfolio composition

Around half of Lone Pine’s $18.86 billion equity portfolio, which was composed of 43 stocks as of the end of fourth-quarter 2019, was invested in the technology and consumer cyclical sectors, followed by smaller holdings in the industrials, health care and communication services spaces.

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As of Dec. 31, the firm’s five largest holdings were Alibaba Group Holding Co. (NYSE:BABA), UnitedHealth Group Inc. (NYSE:UNH), Amazon.com Inc. (NASDAQ:AMZN), Adobe Inc. (NASDAQ:ADBE) and Netflix Inc. (NASDAQ:NFLX).

Disclosure: No positions.

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About the author:

Sydnee Gatewood
I am the editorial director at GuruFocus. I have a BA in journalism and a MA in mass communications from Texas Tech University. I have lived in Texas most of my life, but also have roots in New Mexico and Colorado. Follow me on Twitter! @gurusydneerg

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