Faster than the post office could stamp it "Return to Sender," stamp-and-coin trading house Escala (NASDAQ:ESCL) has rebounded from the plummet its stock took last week, doubling in price in just one trading session. At $9.45 a share, it's still 70% below where it was when the scandal broke at its majority shareholder's offices in Spain. However, it seems investors are speculating just as much in its shares as they were in the stamps the company was trading.
Escala simply issued a press release stating that the Spanish authorities have not charged anyone in its company with any wrongdoing. That's true, but only in the strictest sense. Though it appears that Escala's operations were only tangentially involved in that it supplied the stamps to Afinsa, it seems a bit premature to say the company is in the clear. The scandal is still unfolding in Spain, and where the investigation will ultimately lead is unknown. Potential Escala investors should keep that in mind.
Afinsa Bienes Tangibles is the world's third-largest auction house, ranking behind both Sotheby's (NYSE:BID) and Christie's, but specializing in trading stamps, coins, and other collectibles. In Spain, it offered a special investment program that ultimately came under official scrutiny. Afinsa guaranteed that it would pay interest rates as high as 10% a year to investors (and give them a postdated check for the amount) for a stamp investment. After a year, Afinsa either found a buyer for the stamps at the original purchase price or bought them back itself. The investor then had the option of getting his or her original investment back or choosing to invest in more stamps.
For years, Spaniards were choosing the latter option. Why not? The rates of return that Afinsa was offering, along with another Spanish auction house Forum Filatelico, easily surpassed the 3.5% rates being offered on Spanish bonds.
Until last week, Afinsa's operations were ostensibly perfectly legal. Since the transactions were considered investments and were not backed by anything other than the ephemeral value of the stamps, which Afinsa guaranteed, the $6 billion the Spanish people sunk into the scheme was not insured. When the authorities raided the company's offices last week, arresting 11 people, and charging the company with running a confidence game, the house of cards that had been built up over the years came crashing down.
Here in the U.S., the brunt of that operation was borne by investors in Escala, which derives more than two-thirds of its revenues from Afinsa in an exclusive deal the companies made when the latter became the majority shareholder of what was then Greg Manning Auctions.
As Escala sold ever-greater amounts of stamps to Afinsa to feed the buying frenzy in Spain, its shares responded in kind. In just one year's time, its shares more than tripled in value, going from around $10 a stub to more than $30 each. Yet they lost more than 90% of their value in just a few days last week when the scandal unfolded, falling below $4 a share at one point. While the sell-off was probably overdone, so, too, was the response yesterday when they doubled in price.
For most of its public life, Escala was a small-time stamp-and-coin-trading company. The deal with Afinsa propelled it to the forefront of the philatelic and numismatic world, but it also meant that the company was dependent on Afinsa for its profits. Indeed, without Afinsa, Escala's profits would have been losses. Without the advantage of the demand for its stamps, where will Escala derive its profits in the future?
Perhaps it fell too far, too fast as the scandal broke. That still doesn't mean investors ought to rush back in, simply because a press release said "all clear." The more prudent choice would be to allow this to unfold for better or worse and avoid the chance of getting a cancelled stamp as an investment.
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Fool contributor Rich Duprey does not own any of the stocks mentioned in this article. You can see his holdings here. The Motley Fool has a disclosure policy.
