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

Includes: BID, SPGZ
by: Philip Davis

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: