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.
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.
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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.
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.
Green Mountain Coffee Roasters
My first earnings short-squeeze play is specialty coffee and coffee maker Green Mountain Coffee Roasters (GMCR), which is set to release numbers on Wednesday after the market close. Wall Street analysts, on average, expect Green Mountain Coffee Roasters to report revenue of $963.83 million on earnings of 75 cents per share.
Just recently, KeyBanc said distributor checks suggest there is a very low probability that Green Mountain Coffee Roasters is losing share over the next year and the firm does not believe that a price war is emerging in the K-Cup channel. The firm rates the stock a buy with a price target of $100 per share.
The current short interest as a percentage of the float Green Mountain Coffee Roasters is extremely high at 32.4%. That means that out of the 130.71 million shares in the tradable float, 40.08 million shares are sold short by the bears. The bears have also been increasing their bets from the last reporting period by 11.1%, or by about 4 million shares. If the bears get caught pressing their bets into a bullish quarter, then shares of GMCR could rip sharply higher post-earnings as the bears rush to cover some of their short positions.
From a technical perspective, GMCR is currently trending below both its 50-day and 200-day moving averages, which is bearish. This stock has been downtrending badly for the last two months and change, with shares falling sharply from its high of $89.66 to its recent low of $56.87 a share. During that downtrend, shares of GMCR have been consistently making lower highs and lower lows, which is bearish technical price action. That said, shares of GMCR have now started to bounce off that $56.87 low and it's quickly moving within range of triggering a near-term breakout trade.
If you're bullish on GMCR, then I would wait until after its report and look for long-biased trades if this stock manages to break out above both its 200-day at $67.56 and its 50-day at $70.21 a share with high volume. Look for volume on that move that hits near or above its three-month average action of 4.21 million shares. If that breakout hits, then GMCR will set up to re-test or possibly take out its next major overhead resistance levels at $77 to $85 a share.
I would simply avoid GMCR 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 levels at $60 to $56.87 a share with high volume. If we get that move, then GMCR will set up to re-test or possibly take out its next major support levels at $50 to $45 a share.
J.C. Penney
Another potential earnings short-squeeze trade idea is department store player J.C. Penney (JCP), which is set to release its numbers on Wednesday before the market open. Wall Street analysts, on average, expect J.C. Penney to report revenue $2.80 billion on a loss of $1.72 per share.
Just recently, Gilford Securities analyst Bernard Sosnick said that he believes a 10% to 15% same-store sales gain will be achieved in the fourth quarter of 2013. If so, the firm would anticipate a rally for shares of JCP.
The current short interest as a percentage of the float for J.C. Penney is extremely high at 26.2%. That means that out of the 162.21 million shares in the tradable float, 79.05 million shares are sold short by the bears. The bears have also been increasing their bets from the last reporting period by 3%, or by about 2.29 million shares. If the bears get caught pressing their bets into a strong quarter, then shares of JCP could experience a big short-squeeze post-earnings as the shorts rush to cover some of their bets.
From a technical perspective, JCP is currently trending below both its 50-day and 200-day moving averages, which is bearish. This stock has been uptrending for the last month, with shares moving higher from its low of $6.24 to its recent high of $9.32 a share. During that uptrend, shares of JCP have been consistently making higher lows and higher highs, which is bullish technical price action. That move has now pushed shares of JCP within range of triggering a major breakout trade post-earnings.
If you're in the bull camp on JCP, 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 levels at $9.32 to $10 a share with high volume. Look for volume on that move that hits near or above its three-month average action of 39.49 million shares. If that breakout hits, then JCP will set up to re-test or possibly take out its next major overhead resistance levels at $12 to $14.50 a share.
I would simply avoid JCP or look for short-biased trades if after earnings it fails to trigger that breakout, and then drops below some key near-term support levels at $8 to $7.63 a share with high volume. If we get that move, then JCP will set up to re-test or possibly take out its next major support levels at $7 to its 52-week low at $6.24 a share.
Trina Solar
One potential earnings short-squeeze candidate is integrated solar-power products maker Trina Solar (TSL), which is set to release numbers on Tuesday before the market open. Wall Street analysts, on average, expect Trina Solar to report revenue of $472.92 million on a loss of 14 cents per share.
The current short interest as a percentage of the float for Trina Solar is pretty high at 5.02%. That means that out of the 65.92 million shares in the tradable float, 3.83 million shares are sold short by the bears. If the bulls get the earnings news they're looking for, the shares of TSL could explode sharply higher post-earnings as the bears jump to cover some of their bets.
From a technical perspective, TSL is currently trending above both its 50-day and 200-day moving averages, which is bullish. This stock has been trending sideways and consolidating for the last month and change, with shares moving between $13.62 on the downside and $17.84 a share on the upside. Any high-volume move above the upper-end of its recent range post-earnings could trigger a big breakout trade for shares of TSL.
If you're bullish on TSL, 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 levels at $17.38 a share to its 52-week high at $17.84 a share with high volume. Look for volume on that move that hits near or above its three-month average action of 5.67 million shares. If that breakout hits, then TSL will set up to enter new 52-week high territory, which is bullish technical price action. Some possible upside targets off that breakout are $25 to $27 a share.
I would avoid TSL 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 levels at $15.92 to $14.77 a share with high volume. If we get that move, then TSL will set up to re-test or possibly take out its next major support levels $13.62 to $11 a share.
GameStop
Another earnings short-squeeze prospect is multichannel video game retailer GameStop (GME), which is set to release numbers on Thursday before the market open. Wall Street analysts, on average, expect GameStop to report revenue of $1.98 billion on earnings of 57 cents per share.
Just recently, Piper Jaffray analyst Michael Olson said that he is more confident that GameStop's fourth quarter revenue will surpass his estimate of $3.84 billion following Sony's announcement that North America PlayStation sales beat expectations.
The current short interest as a percentage of the float for GameStop is extremely high at 17%. That means that out of the 114.10 million shares in the tradable float, 19.48 million shares are sold short by the bears. If this company can deliver the earnings news the bulls are looking for, then shares of GME could explode higher post-earning as a sharp short-covering rally takes hold.
From a technical perspective, GME is currently trending above both its 50-day and 200-day moving averages, which is bullish. This stock recently formed a double top chart pattern, since GME ran into stiff resistance at $57.21 to $57.74 a share. If that stiff overhead resistance can get taken out post-earnings, then shares of GME will break out and have the chance to head significantly higher.
If you're bullish on GME, 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 levels at $57.50 to its 52-week high at $57.74 a share with high volume. Look for volume on that move that hits near or above its three-month average action of 1.94 million shares. If that breakout hits, then GME will set up to enter new 52-week-high territory, which is bullish technical price action. Some possible upside targets off that breakout are $65 to $70 a share.
I would simply avoid GME 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 levels at $53.64 a share to its 50-day at $52.83 a share high volume. If we get that move, then GME will set up to re-test or possibly take out its next major support levels at $47 to $42.50 a share, or even its 200-day at $40.46 a share.
Best Buy
My final earnings short-squeeze play is multichannel consumer electronics retailer Best Buy (BBY), which is set to release numbers on Tuesday before the market open. Wall Street analysts, on average, expect Best Buy to report revenue of $9.36 billion on earnings of 11 cents per share.
Just recently, UBS upgraded shares of Best Buy citing a cost-cutting program that is running parallel to Best Buy's other initiates. Jefferies analyst Daniel Binder also likes the stock, and he just upped his price target by $12 a share to $52 per share. Binder said after big cost cuts and investments in service and its supply chain, he expects a dramatic improvement in the company's performance.
The current short interest as a percentage of the float for Best Buy is notable at 6.8%. That means that out of the 278.45 million shares in the tradable float, 18.60 million shares are sold short by the bears. This isn't a huge short interest, but it's more than enough to spark a sharp short-covering rally post-earnings if Best Buy can deliver the earnings news the bulls are looking for.
From a technical perspective, BBY 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 soaring higher from its low of $25.66 to its recent high of $44.66 a share. During that uptrend, shares of BBY have been consistently making higher lows and higher highs, which is bullish technical price action. That move has now pushed shares of BBY within range of triggering a big breakout trade post-earnings.
If you're in the bull camp on BBY, 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 $44.66 a share (or Monday's intraday high if higher) with high volume. Look for volume on that move that hits near or above its three-month average volume of 5.89 million shares. If that breakout hits, then BBY will set up to 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 BBY 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 levels at $42 to its 50-day at $40.49 a share with high volume. If we get that move, then BBY will set up to re-test or possibly take out its next major support levels at $38 to $34 a share.
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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