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TheStreet Open House

3 Earnings Short-Squeeze Stocks

BALTIMORE ( Stockpickr) -- As we move through the earnings season, I love to search the market for stocks that look poised for an earnings short squeeze. These stocks can produce outsized gains due to the fact that they're heavily shorted by the bears. They also hold a lot of risk; after all, the bears have found some reason to think that they'll trade much lower.

Last week, the bears won the battle on two of my picks, with First Solar (FSLR) and InterDigital (IDCC) trading sharply lower following their earnings reports. My only winner was Brigham Exploration (BEXP), which I mentioned at around $33 a share and is now changing hands at around $37.

Neither FSLR nor IDCC delivered the fundamental results that the bulls were looking for, so the bears subsequently gained control and whacked both stocks. This is simply part of the game when trading earnings short-squeeze candidates, and it's what makes it important to cut the losers quick if a short squeeze doesn't materialize. Don't ever let an earnings short-squeeze trade turn into an investment if your play was only to trade the earnings event. There are enough heavily shorted stock candidates that will produce large gains and easily take care of the losers.

Related: Rocket Stocks for the Week

Remember, the winners tend to advance significantly, so they make this trading strategy worth the risk as long as you cut the losers fast. This is a game of probability, so it's important to realize that it's virtually impossible that every name I highlight is going to be a winner. However, I will continue to strive to pick the best names that I think have the greatest chance of producing an earnings short squeeze if the companies deliver the fundamental results that Wall Street is looking for.

Before we take a look at some potential earnings short-squeeze candidates, let's go over the basics. A short squeeze is a rapid increase in the price of a stock that occurs when there is a lack of supply and an excess of demand for the stock. Short squeezes happen when bears who've sold the stock short are forced to cover their position on a stock as it rises. Short sellers will cover their positions to avoid losses further losses.

Here's a look at a number of stocks that could experience a big short squeeze when they report earnings this week.

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