DELAFIELD, Wis. (Stockpickr) -- Short-sellers hate being caught short a stock that reports a blowout quarter. When this happens, we often see a tradable short squeeze develop as the bears rush to cover their positions to avoid big losses. Even the best short-sellers know that it's never a great idea to stay short once a bullish earnings report sparks a big short-covering rally.
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This is why I scan the market for heavily shorted stocks that are about to report earnings. You only need to find a few of these stocks in a year to help enhance your portfolio returns -- the gains become so outsized in such a short time frame that your profits add up quickly.
That said, let's not forget that stocks are heavily shorted for a reason, so you have to use trading discipline and sound money management when playing earnings short-squeeze candidates. It's important that you don't go betting the farm on these plays and that you manage your risk accordingly. Sometimes the best play is to wait for the stock to break out following the report before you jump in to profit off a short squeeze. This way, you're letting the trend emerge after the market has digested all of the news.
Of course, sometimes the stock is going to be in such high demand that you risk missing a lot of the move by waiting. That's why it can be worth betting prior to the report -- but only if the stock is acting technically very bullish and you have a very strong conviction that it is going to rip higher. Just remember that even when you have that conviction and have done your due diligence, the stock can still get hammered if The Street doesn't like the numbers or guidance.
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If you do decide to bet ahead of a quarter, then you might want to use options to limit your capital exposure. Heavily shorted stocks are usually the names that make the biggest post-earnings moves and have the most volatility. I personally prefer to wait until all the earnings-related news is out for a heavily shorted stock and then jump in and trade the prevailing trend.
With that in mind, here's a look at several stocks that could experience big short squeezes when they report earnings this week.
Lindsay
My first earnings short-squeeze trade idea is water management and road infrastructure products and services provider Lindsay (LNN), which is set to release numbers on Thursday before the market open. Wall Street analysts, on average, expect Lindsay to report revenue of $155.68 million on earnings of 91 cents per share.
The current short interest as a percentage of the float Lindsay is extremely high at 21.3%. That means that out of the 12.56 million shares in the tradable float, 2.67 million shares are sold short by the bears. This is a huge short interest on a stock with a low tradable float. Any bullish earnings news could easily set off a monster short-squeeze for shares of LNN post-earnings.
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From a technical perspective, LNN is currently trending above its 50-day moving average and just below its 200-day moving average, which is neutral trendwise. This stock has been downtrending badly for the last month, with shares plunging lower from its high of $90 to its recent low of $78.75 a share. During that move, shares of LNN have been consistently making lower highs and lower lows, which is bearish technical price action. That said, shares of LNN have started to bounce off that $78.75 low and it's starting to move within range of triggering a near-term breakout trade post-earnings.
If you're bullish on LNN, then I would wait until after its report and look for long-biased trades if this stock manages to break out above its 200-day moving average at $81.71 a share with high volume. Look for volume on that move that hits near or above its three-month average volume of 133,886 shares. If that breakout hits, then LNN will set up to re-test or possibly take out is next major overhead resistance levels at $84 to $87 a share. Any high-volume move above $87 will then give LNN a chance to tag $90 a share.
I would simply avoid LNN or look for short-biased trades if after earnings it fails to trigger that breakout and then drops back below its 50-day at $78.89 a share and below some near-term support at $78.75 a share with high volume. If we get that move, then LNN will set up to re-test or possibly take out its next major support levels at $73 to $70 a share.
Safeway
Another potential earnings short-squeeze play is food and drug retailer Safeway (SWY), which is set to release its numbers on Thursday before the market open. Wall Street analysts, on average, expect Safeway to report revenue of $8.52 billion on earnings of 16 cents per share.
Just recently, Jefferies initiated shares of Safeway with a hold rating and a price target of $32 per share.
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The current short interest as a percentage of the float for Safeway is very high at 19.8%. That means that out of the 236.01 million shares in the tradable float, 47.13 million shares are sold short by the bears. The bears have also been increasing their bets from the last reporting period by 2.8%, or by about 1.27 million shares. If the bears are caught pressing their bets into a bullish quarter, then shares of SWY could soar sharply higher post-earnings as the bears rush to cover some of their bets.
From a technical perspective, SWY is currently trending above both its 50-day and 200-day moving averages, which is bullish. This stock has been uptrending strong for the last three months, with shares pushing higher from its low of $22.19 to its recent high of $32.72 a share. During that move, shares of SWY have been consistently making higher lows and higher highs, which is bullish technical price action. That move has now pushed shares of SWY within range of triggering a near-term breakout trade post-earnings.
If you're in the bull camp on SWY, then I would wait until after its report and look for long-biased trades if this stock manages to break out above some near-term overhead resistance at $32 a share and then once it takes out its 52-week high at $32.72 a share with high volume. Look for volume on that move that hits near or above its three-month average action of 5.11 million shares. If that breakout triggers, then SWY will set up to enter new 52-week-high territory, which is bullish technical price action. Some possible upside targets off that move are $40 to $42 a share.
I would simply avoid SWY or look for short-biased trades if after earnings it fails to trigger that breakout, and then drops back below some key near-term support at $30 a share with high volume. If we get that move, then SWY will set up to re-fill some or its entire previous gap up zone from September that started at $28 a share. If that gap gets filled to the downside, then SWY could easily tag its 50-day at $27.75 a share.
Bank of the Ozarks
One potential earnings short-squeeze candidate is banking player Bank of the Ozarks (OZRK), which is set to release numbers on Thursday after the market close. Wall Street analysts, on average, expect Bank of the Ozarks to report revenue of $69.57 million on earnings of 60 cents per share.
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The current short interest as a percentage of the float for Bank of the Ozarks is pretty high at 9.7%. That means that out of the 31.18 million shares in the tradable float, 3.16 million shares are sold short by the bears. This is a decent short interest on a stock with a relatively low float. Any bullish earnings news could easily spark a sharp short-covering rally for shares of OZRK post-earnings.
From a technical perspective, OZRK is currently trending above its 200-day moving average and just below its 50-day moving average, which is neutral trendwise. This stock has been trending sideways for the last two months, with shares moving between $45.05 on the downside and $48.94 on the upside. Any high-volume move above the upper-end of that range could trigger a solid breakout trade for shares of OZRK post-earnings.
If you're bullish on OZRK, then I would wait until after its report and look for long-biased trades if this stock manages to break out above its 50-day moving average of $47.38 a share and then once it takes out its 52-week high at $48.94 a share with high volume. Look for volume on that move that hits near or above its three-month average action of 125,254 shares. If that breakout triggers, then OZRK will set up enter new 52-week-high territory, which is bullish technical price action. Some possible upside targets off that breakout are $55 to $60 a share.
I would avoid OZRK or look for short-biased trades if after earnings it fails to trigger that move and then drops back below some key near-term support levels at $46 to $45.05 a share with high volume. If we get that move, then OZRK will set up to re-test or possibly take out its next major support levels at $43 to its 200-day at $42.44 a share.
Micron Technology
Another earnings short-squeeze prospect is global manufacturer and marketer of semiconductor devices Micron Technology (MU), which is set to release numbers on Thursday after the market close. Wall Street analysts, on average, expect Micron Technology to report revenue of $2.70 billion on earnings of 24 cents per share.
Just recently, Citigroup raised its price target on shares of Micron to $30 per share from $19 per share, citing higher DRAM price assumptions, and reiterated its buy rating on the stock.
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The current short interest as a percentage of the float for Micron Technology is pretty high at 10.9%. That means that out of the 1.03 billion shares in the tradable float, 111.99 million shares are sold short by the bears. The bears have also been increasing their bets from the last reporting period by 4.5%, or by about 4.86 million shares. If the bears are caught pressing their bets into a strong quarter, then shares of MU could explode higher post-earnings as the bears jump to cover some of their short positions.
From a technical perspective, MU is currently trending above both its 50-day and 200-day moving averages, which is bullish. This stock has been uptrending strong for the last six months, with shares moving higher from its low of $9.07 to its recent high of $18.85 a share. During that uptrend, shares of MU have been consistently making higher lows and higher highs, which is bullish technical price action. That move has now pushed shares of MU within range of triggering a near-term breakout trade post-earnings.
If you're bullish on MU, then I would wait until after its report and look for long-biased trades if this stock manages to break out above its 52-week high at $18.85 a share with high volume. Look for volume on that move that hits near or above its three-month average action of 43.01 million shares. If that breakout triggers, then MU will set up to enter new 52-week-high territory, which is bullish technical price action. Some possible upside targets off that move are $23 to $25 a share.
I would simply avoid MU or look for short-biased trades if after earnings it fails to trigger that breakout and then drops back below some key near-term support at $17 a share with high volume. If we get that move, then MU will set up to re-test or possibly take out its next major support levels at its 50-day moving average of $15.36 a share to $13 a share.
E2open
My final earnings short-squeeze idea is cloud-based, on-demand software solutions provider E2open (EOPN), which is set to release numbers on Thursday after the market close. Wall Street analysts, on average, expect E2open to report revenue of $17.23 million on a loss of 15 cents per share.
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The current short interest as a percentage of the float for E2open is very high at 14.6%. That means that out of the 10.50 million shares in the tradable float, 1.91 million shares are sold short by the bears. This is a large short interest on a stock with a very low tradable float. If the bulls get the earnings news they're looking for, then shares of EOPN could skyrocket higher post-earnings as the bears rush to cover some of their short positions.
From a technical perspective, EOPN is currently trending above both its 50-day and 200-day moving averages, which is bullish. This stock has been uptrending strong for the last five months, with shares moving higher from its low of $12.27 to its recent high of $25.86 a share. During that move, shares of EOPN have been making mostly higher lows and higher highs, which is bullish technical price action. That move has now pushed shares of EOPN within range of triggering a near-term breakout trade post-earnings.
If you're in the bull camp on EOPN, then I would wait until after its report and look for long-biased trades if this stock manages to break out above some near-term overhead resistance at $22.62 a share with high volume. Look for volume on that move that hits near or above its three-month average volume of 112,043 shares. If that breakout triggers, then EOPN will set up to re-test or possibly take out its all-time high at $25.86 a share. If that level gets taken out with volume, then EOPN could hit $30 or higher post-earnings.
I would avoid EOPN or look for short-biased trades if after earnings it fails to trigger that breakout and then drops back below some key near-term support at $21.17 a share with high volume. If we get that move, then EOPN will set up to re-test or possibly take out its next major support levels at $19 to its 200-day at $18.43 a share. Any high-volume move below its 200-day could then out $17 to $16 into range for shares of EOPN.
To see more potential earnings short squeeze plays, check out the Earnings Short Squeeze Plays portfolio on Stockpickr.
-- Written by Roberto Pedone in Delafield, Wis.
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At the time of publication, author had no positions in stocks mentioned.
Roberto Pedone, based out of Delafield, Wis., is an independent trader who focuses on technical analysis for small- and large-cap stocks, options, futures, commodities and currencies. Roberto studied international business at the Milwaukee School of Engineering, and he spent a year overseas studying business in Lubeck, Germany. His work has appeared on financial outlets including
CNBC.com and Forbes.com. You can follow Pedone on Twitter at www.twitter.com/zerosum24 or @zerosum24.
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