WINDERMERE, Fla. ( Stockpickr) -- Taking a long position in a heavily shorted stock ahead of the company's earnings can produce big gains for the bulls if the short-sellers capitulate and cover their bearish bets. That's exactly what unfolded with two of my three earnings short squeeze picks last week.
Men's tailored clothing maker Jos. A Bank Clothiers (JOSB), which is famous for its "buy one, get one free" advertising promotions, posted record profits and sales, and the stock took off. On March 29, the stock was trading at around $47 a share. Following the March 31 earnings report, shares of Jos. A Bank Clothiers hit a high of $52.50. That's not a huge gain, but a profit of around $5.50 a share in a very short time frame is nothing to sneeze at.
Irrigation systems player Lindsay (LNN) was my other earnings short-squeeze trade winner, after the company reported second-quarter revenue of $120.2 million compared with Wall Street estimates of $109.8 million. Lindsay said its quarterly results beat the market due to strong demand for its irrigation systems in the U.S. and worldwide. On March 29, the stock was trading at around $75, and following the report, the stock high a high of $85.87 a share.
Related: 8 Stocks Setting Up to Break OutMy only loser last week was Krispy Kreme Doughnuts (KKD - Get Report), which traded down by around 20% after the company said it had swung to a loss in its fiscal fourth quarter. Kripsy Kreme actually saw good volume on the day it was set to report, and the stock was even breaking above a descending trend line, but the technicals weren't enough to save this stock. The company flat out blew it, and the stock was punished. Now the stock is trading right at its 200-day moving average $5.46 a share. If you want to own it, you can buy it here with a mental stop just below this key level. A mental stop means not placing a physical stop order with your broker but instead just selling it when it hits an area you want to get out at. If you're going to trade an earnings short-squeeze candidate, make sure you're only using risk capital and that you're prepared to cut your losses quickly in case the trade doesn't work out. You'll also need to be prepared to trade outside of regular trading hours because that happens to be when most earnings reports are released. 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 have 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 earnings-related trades, including a long, a short and a few heavily shorted stocks that could experience a big squeeze.