5 Stocks That Could Pop on Earnings

Chelsea Therapeutics

My first earnings short-squeeze candidate is Chelsea Therapeutics (CHTP), which is set to report its results on Tuesday after the market close. This is a development stage pharmaceutical company that focuses on acquiring, developing and commercializing products for the treatment of a variety of human diseases. Wall Street analysts, on average, expect Chelsea Therapeutics to report a loss of 24 cents per share.

The company has missed estimates for the past two quarters, but those misses haven't been big ones. For example, last quarter Chelsea missed by 2 cents after reporting a loss of 25 cents versus estimates of a net loss of 23 cents per share. The quarter before that, it also missed by just 2 cents. If the company can break the streak for this quarter and provide some bullish news on their drug pipeline, then the stock could see a solid short squeeze.

The current short interest as a percentage of the float for CHTP is a notable 9.2%. That means that out of the 48.44 million shares in the tradable float, 4.84 million are sold short by the bears. The short-sellers have also been increasing their bets from the last reporting period by 8.1%, or by about 362,900 shares. This large increase in short bets could catch the bears leaning the wrong way if CHTP reports a solid quarter and issues bullish guidance.

From a technical standpoint, shares of CHTP have recently dropped from a high of $6.06 a share to its current price of $5.20 a share. The stock also recently found some buying support just above both its 50-day and 200-day moving averages, which is bullish. The stock has also been up trending strong going into this quarter with shares up from its June lows of around $4.15 a share.

The way I would play CHTP is to wait for the company to report and buy the stock if it trades above $5.65 a share on heavy volume. I would add to any long position once you see CHTP breakout above $6.06 a share. A move above $6.06 could set up this stock for a run back towards its 52-week high of $8.20 a share. I would only short this stock if it drops below both its 50-day and 200-day moving averages following their earnings.

I recently included Chelsea Therapeutics on a list of stocks poised for breakouts.

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