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Why Luckin Coffee Stock Jumped 10% Today

Rich Smith, The Motley Fool

What happened

Shares of recent IPO Luckin Coffee (NASDAQ: LK) are surging -- up nearly 10% in early morning trading and still up a healthy 8.6% as of noon EDT.

Why? As Barron's reported over the weekend, "two sovereign-wealth funds and an American financial giant recently said they are large shareholders in the so-called Starbucks of China."

Coffee with a smiley face carved out in its foam

Image source: Getty Images.

So what

According to the magazine, Caron Investments -- a subsidiary of Singaporean sovereign wealth fund GIC Private Ltd. -- has revealed that in 2018, before Luckin's IPO on the Nasdaq, it bought $45 million worth of its preferred stock, which has since been converted into common shares constituting a 13% stake in the company. Combined with a 0.6% stake separately owned by GIC Private, the sovereign wealth fund now owns more than 13.6% of the coffee house chain.

Barron's also noted that the Qatar Investment Authority, another sovereign wealth fund, revealed Friday that it owns an 8.8% stake in Luckin; and Capital Research Global Investors, part of the Los Angeles based Capital Group Companies, owns 15.6% of Luckin.

Now what

Add it all up, and these three entities control 38% of Luckin. But should this really make a difference to individual investors who own smaller stakes?

After all, someone has to own those shares. Sure, the fact that ownership is heavily concentrated among three entities could become significant if one or more of them decided to try to buy more shares (to secure control over the company). But it can also become significant if one or more of these investors loses confidence and begins selling its stake, flooding the market with unwanted shares.

The rewards and risks from this revelation seem pretty equally balanced. They certainly don't add up to any compelling reason to buy Luckin stock today.

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Rich Smith has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.