WINDERMERE, Fla. ( Stockpickr) -- Short-sellers hate being caught short a stock that produces earnings that please the bulls. 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 timeframe 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. That's why it can be worth betting prior to the report: Buy only if you have a very strong conviction that the stock is going to rip higher, and it's acting technically very bullish.Here's a look at a number of stocks that could experience big short squeezes when their companies report earnings this week. Cubist Pharmaceuticals My first earnings short-squeeze trade idea is biopharmaceutical player Cubist Pharmaceuticals (CBST), which is set to release its numbers on Thursday after the close. Wall Street analysts, on average, expect Cubist Pharmaceuticals to report revenues of $204.74 million on earnings of 32 cents per share. If you're looking for a stock that's trending very strong heading into their earnings report, you should take a strong look at shares of Cubist Pharmaceutical. During the last six months, this stock is up over 18%. Shares of Cubist are so strong that this stock is just one point off its 52-week high of $42.10 a share.