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TheStreet Open House

3 Short-Squeeze Stocks for Earnings Season

Stock quotes in this article: SKUL, DWA, KBH

Skullcandy (SKUL) develops and distributes headphones and other audio accessories to retailers in the United States and to distributors internationally. This is a basic, easy-to-understand business -- I like those because it's easier for me to conceptualize how they operate than, say, a biotechnology company -- that is experiencing rapid growth with the explosion of smartphones, iPods and iPads.

The company is due to report earnings on May 7. Revenues are projected to jump by 24% in FY2012. With 125% of the stock's float (shares available to the public) being shorted, if the company provides any upside surprise this stock is poised for an explosive rally fueled by short-covering. A retest of the all-time high of $23.40 is probable, with a break above that level leading to a runaway rally.

DreamWorks Animation SKG (DWA) engages in the development, production and exploitation of animated films and associated characters worldwide primarily for the theatrical, home entertainment, television, merchandising and licensing markets. It has approximately 23 animated feature films, including the popular Shrek and Madagascar franchises.

This is an example of an older company that is deeply oversold. It's doubtful to me that even bad news could sink this stock much further. And the news around this company is set to improve.

In addition to a new Madagascar film due out in June, DreamWorks recently signed a deal with China that has long-term promise. The company also plans to ramp up its production schedule in coming years to make sure it releases a minimum of three major motion pictures in any given year. These developments point to improved momentum for the business, and that should be bad news for short sellers. About 29% of the outstanding float is currently held short. Our price target is the $22-$23 area.

Finally, take a look at KB Home (KBH). Much like DreamWorks, KBH is a stock that was sold hard during the previous three years. If you wanted out of home construction stocks -- and pretty much everyone did -- you got out during this period. The stock enjoyed a nice rally earlier this year, but it has sold off hard since and is now trading just below its 200-day moving average.

Though the housing sector isn't poised for explosive growth this year, one look around your own neighborhood will tell you that the situation is ripe for new construction again. Inventory is drying up in most areas. Consequently, the news out of this sector and this company will offer more positive than negative surprises, and with over 62% of the float being shorted, KBH makes a decent candidate for a short-squeeze. My price target is $10.50.

>>To see these stocks in action, visit the 3 Short-Squeeze Stocks for Earnings Season portfolio on Stockpickr.

Robert Walberg is chief market strategist and editor of Premium Products at TheStreet. Prior to joining TheStreet, Walberg was founder and president of Chartwell Asset Management, a financial advisory company. Before founding Chartwell, he worked as a financial analyst and columnist for MSN Money from 2003 to 2008. Walberg was on the founding team at Briefing.com from 1996 to 2003, working as chief equity analyst, formulating the company's near-, intermediate- and long-term market positions. He was regularly quoted by The Wall Street Journal, Bloomberg, Reuters and Investor's Business Daily and made guest appearances on Fox Business, CNBC, CNN, ABC World News and The Daily Show with Jon Stewart. Walberg received a bachelor's degree in political science from the University of Illinois.

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