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Collectibles company Escala (ESCL) plummeted at the end of last week due to an investigation (including raids on offices) conducted on them by Spanish authorities over some stamp scandal -- dropping the stock from $32 to $4 in just 3 days. 8 people were arrested and there is shareholder litigation brewing (of course):

The prosecutor's office also said it plans to make "several arrests" as part of a lawsuit against the companies on charges ranging from tax evasion and money laundering to criminal insolvency and falsification of documents.

Not what I would usually call a buying opportunity! Barron's broke this story last week and exposed the ponzi scheme by rival stamp peddler Afinsa, a co-owner of Escala (it would be so cool to have a research team that digs up those connections!).

Escala does not seem to be at fault here and has appointed a new CFO, but losing their partner Afinsa, who accounted for about half of their profits, will hurt a lot. But not enough to justify a p/e of 6, which it is currently trading at.

The stock doubled yesterday, but I don't like it as at any moment more doors could be kicked in.

I think the winning play here is Sotheby's (NYSE:BID), who should net a lot of business as the well-heeled society types who buy and sell collectables avoid any association with scandal.

They are comming off a pullback from what I thought were pretty good earnings and may still test the 50 dma at $28.50 but I'm going to begin a small options play on the Oct $30s at $2.90, while hoping to pick up the bulk at a lower price.

ESCL 2-month chart:


BID 1-yr chart:


Source: Sotheby's To Gain From Escala's Troubles (ESCL, BID)