3 Earnings Short-Squeeze Stock Trades
WINDERMERE, Florida (Stockpickr) -- I love to scan the market for stocks that have the potential for massive earnings short squeezes.
When a stock that is heavily shorted heading into its
delivers a great set of numbers, it can see gigantic moves as the bears are forced to cover their positions. Of course, on the flip side, if the company disappoints, then the bears have a license to hammer the stock into oblivion.
That's why it's best to find a number of potential earnings short squeeze candidates and pick the names that are displaying the best price action on heavy volume going into their earnings calls.
What's even more helpful right now in squeezing the bears out of their short positions is that the
S&P 500
and the
Nasdaq
are trading in pure
following the news that the Obama Administration has decided to extend the Bush-era tax cuts for two more years. This will put added pressure on the bears that are heavily short upcoming
to cover their bets since the overall market trend is growing stronger. This will really come into play on any heavily shorted earnings play that reports a bullish report that Wall Street likes.
The only major index that isn't in breakout territory is the
Dow Jones Industrial Average
. That index will enter breakout territory once it takes out 11,451.53. Once the Dow joins the party, then the bears will really be on the run and forced to think twice about shorting any stock that isn't in a clear downtrend.
There are a number of strategies that investors can use to play heavily shorted stocks heading into their earnings report. One way is to take a position ahead of the report if you think the company is going to report strong results. With this strategy, I would advise readers to look for stocks with heavy volume above the three-month average daily volume, which must be confirmed by bullish upside price action. If you don't see these characteristics, then I would wait for the report and see what transpires before placing your bets.
Traders can also wait for a company to report its numbers and for strength in the stock before jumping in to trade the momentum. There's nothing wrong with getting confirmation of the move first and missing some of the gap up just to make sure you're on the right side of the trade.
There's also nothing wrong with letting a stock come in first if it doesn't act right ahead of earnings and then taking a long position and playing the name for a reversal. Sometimes the shorts are right at first and the bulls then move in to squeeze them after a reasonable selloff.
Apple
(AAPL) - Get Report
is the perfect example of this after the stock sold off below $300 a share after its most recent earnings report. As you can see now, the stock has been punishing the bears and is setting up to break out above $321.30 a share.
Before we take a look at some potential earnings short-squeeze trades, let's do a bit of review. A short squeeze is a rapid increase in the price of a stock due to a lack of supply and an excess of demand. Short squeezes happen when bears who've sold a stock short are forced to cover their positions to avoid further losses as the stock rises.
Here's a look at a few stocks that could experience
big short squeezes when they report earnings
.
My first idea for an earnings short-squeeze trade is
Diamond Foods
(DMND)
, a packaged food company focusing on processing, marketing and distributing snack products.
This stock has put in a solid 2010 so far, with shares up around 29%. Diamond Foods is set to report earnings on Dec. 8 after the close of the market. Wall Street analysts are looking for Diamond to report revenue in a range of $221 million to $265 million.
What I really like about this stock heading into the earnings call is that it recently hit a brand new
of $48.45, and it's currently trading only two points off that high. This shows that Diamond Foods has some relative strength and is trending in the right direction heading into the earnings report. It also doesn't hurt that the company raised its fiscal 2011 guidance during its last earnings call, and a number of
, including the CEO and CFO, jumped in to buy more than 365,000 shares after the stock slid last quarter.
Now if the company can just report a solid quarter and say it's on track for the guidance it provided last quarter, then this stock sets up great for a massive short squeeze.
The current short interest as a percentage of the float for Diamond is extremely high at over 29%. That means that out of the 21.23 million shares in the public float available for trading, 6.16 million shares are currently sold short as of Nov. 15. The shorts have even increased their bets from the previous reporting period by around 3%, from 5.9 million total shares sold short. This is a huge short interest on a stock with an extremely low float. Since the supply and demand situation is so imbalanced, the stock could take off like a rocket ship if a short squeeze does materialize.
If you're looking to play Diamond prior to its report, then I would look for the stock to trend up the day of its report on volume that's above 230,000 shares. If you see that take place, then the chances are very high that this low-float, large-short-interest stock could explode higher if the company delivers.
Another potential earnings short squeeze trade is
Martek Biosciences
( MATK), a
engaged in the innovation and development of nutritional products from microbial sources, including algae, fungi and other microbes that promote health and wellness.
This stock hasn't been a huge winner year-to-date, but it's up a respectable 25%. Martek is set to report earnings on Dec. 8 after the close of the market. Wall Street analysts are looking for revenue to come in between $109 million and $113 million. If the company can deliver results toward the upper end of that range, it would mean that sales growth from the previous year would come in at around 26%.
When you take a look at the current price-to-earnings which is 17, and the forward price-to-earnings which is around 14, it's easy to see that this stock is cheap if the company can deliver mid-20% sales growth. Martek also has a strong balance sheet, with around $22 million in net cash on the books.
Considering how big the trend is toward people consuming healthier and more nutritional products, I think we have a good chance here for Martek to report strong results and bullish guidance. It doesn't hurt the stock's chances, either, that the shares aren't trading at some absurd multiple.
The current short percentage of the float for Martek is a rather large 22% as of the most recent reporting period of Nov. 15. That means that out of the 33.22 million-share tradable float, around 7.2 million shares are currently sold short by the bears. This is another case of a very low-float, high-short-interest stock that could easily explode higher if the company can deliver.
From a technical standpoint, I absolutely love the way that shares of Martek are acting heading into the earnings report. The stock just recently busted through its 50-day moving average of $22.68 a share and took out some previous overhead resistance at around $24.05 a share. This is telling me that the shorts are worried and are starting to get squeezed out of their positions.
Watch for Martek to take out $25 to $25.43 a share on volume above the three-month average daily action of 228,000 shares. If you see that occur, I would then ride this stock long for what should be a giant short squeeze.
Another stock that could be setting up for a big earnings short squeeze is
FactSet Research Systems
(FDS) - Get Report
, which provides financial and economic information on various companies, analytical applications and client services to the
, research and performance analysts, risk managers, marketing professionals, sell-side equity research professionals, investment bankers and fixed-income professionals worldwide.
This stock has been a
, with shares up 42% so far on the year. This Wall Street research play is set to report earnings on Dec. 14 before the market opens. Analysts are looking for revenue to come in between $171 million to $173 million.
With all of the recent news about insider trading surrounding so-called expert-network firms, FactSet Research could be one of a handful of companies doing legitimate research that could benefit from the fallout. I say "legitimate" in terms of the perception that expert-network firms were somehow doing something illegal. We just don't know what the outcome of these cases will be yet, and I think FactSet could be picking up a lot of new clients as many large hedge funds distance themselves from the research firms that are currently in the government's crosshairs.
As of Nov. 15, the current short interest as a percentage of the float for FDS is 7.3%. That means that out of the 42.68 million shares in the tradable float, around 3.07 million shares are currently sold short by the bears. This is another low-float situation with a reasonable short interest, which could be set to rip higher if the company can deliver strong results.
From a technical standpoint, FactSet looks resoundingly strong with the stock trading very close to its 52-week high of $94.45 a share, which also happens to be the stock's all-time high. It's also worth noting that shares of FactSet recently broke out above some previous overhead resistance at around $89.64 a share. This stock is trending very strong as we quickly approach its earnings report. This is exactly the type of action you want to see in any stock before a company reports earnings.
If you see strong price action and solid volume patterns heading into the Dec. 14 earnings report, then I think this stock will be hitting $100 a share in very short order. Look for up days with volume that comes in well above the three-month average daily action of around 289,000 shares for confirmation that the shorts could be in trouble with FactSet.
To see more potential earnings short squeeze candidates, like
AeroVironment
(AVAV) - Get Report
,
National Semiconductor
(NSM)
and
Bio-Reference Laboratories
(BRLI)
, check out the
portfolio on Stockpickr.
-- Written by Roberto Pedone in Winderemere, Fla.
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At the time of publication, author had no positions in stocks mentioned.
Roberto Pedone, based out of Windermere, Fla., is an independent trader who focuses on stocks, options, futures, commodities and currencies. He is also an outside contributor to Beconequity.com and maintains the website Maddmoney.net, which he sold to Blue Wave Advisors in 2008. Roberto studied International Business at The Milwaukee School of Engineering, and he spent a year overseas studying business in Lubeck, Germany.