3 Earnings Short-Squeeze Stocks

These heavily shorted stocks could get squeezed higher when they report earnings.
By Roberto Pedone ,

WINDERMERE, Fla. (Stockpickr) -- Trading a stock from the long side that's heavily shorted ahead of its earnings call is one of the best ways to produce some great short-term profits.

Of course, this doesn't mean such a trade is risk-free, but with great risk can come great reward. For example, look at what happened recently with yoga-inspired apparel maker

Luluemon Athletica

(LULU) - Get Report

and communications networking equipment maker

Ciena Corporation

(CIEN) - Get Report

, both of which I highlighted as

potential earnings short-squeeze trades

back on Dec. 1. Subsequently, both stocks did experience notable squeezes -- and in Luluemon's case, a very notable one. When I wrote that article, Luluemon was trading around $54 a share, and right now the stock is trading near $70. Ciena was changing hands at close to $15 a share and now is now trading near $19.50.

Buying either of these stocks ahead of its earnings call produced some huge returns in a very short time frame. Both of these stocks possessed the qualities that I like to see in an earnings short-squeeze candidate, including a high short interest, a reasonably low tradable float, an uptrending stock ahead of the report and the chance for solid fundamental news.

Related Article:

How to Trade This Week's Earnings

Before we take a look at some potential earnings short-squeeze trades, let's go over what a short squeeze is exactly. 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've 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.

With that in mind, here's a look at a

number of stocks

that could experience a big short squeeze when they report earnings.

My first idea for an earnings short squeeze trade is

Research In Motion

(RIMM)

, which is scheduled to report its results on Thursday. This company is a designer, manufacturer and marketer of wireless solutions for the worldwide mobile communications market. During the last three months,

this stock has been uptrending nicely

, with shares up around 35%. Wall Street analysts are looking for Research In Motion to report revenues in a range of 5.1 billion to $5.5 billion.

A number of Wall Street analysts are suggesting that RIMM will report robust results, and I think the chances of that are high. Analysts are expecting good things from RIMM due to strong sales of its flagship smartphone, the BlackBerry Torch. Some are even suggesting that RIMM has sold as many BlackBerry phones in the last quarter as

Apple

(AAPL) - Get Report

sold iPhones. If that is indeed the case, it would clearly show that the BlackBerry maker is far from dead as many have been predicting.

What could be even better for RIMM is if the company's management says anything bullish about the future for its Playbook tablet device, which is set to come to market sometime in early 2011. If the company sees strong visibility for the sales of the Playbook moving forward, then it could surprise the Street.

The current short interest as a percentage of the float for RIMM is worth mentioning at around 6.9%. That means that out of the 462 million shares that are available for trading on daily basis, 31 million shares are currently sold short as of Nov. 30. This is enough of a short interest to spark a big short squeeze if RIMM reports what Wall Street is looking for. I would also like to point out that RIMM has a history of making big up moves when it reports solid results.

From a technical standpoint, I would love to see RIMM trade above $64 a share either before or after it reports. If that level is taken out to the upside, then I think a massive short squeeze will begin to take hold for this stock. However, all bets are off in my book if we see any large selling days on or before the earnings date that register volume above the three-month average volume of 16.5 million shares.

I like the setup here that's shaping up in RIMM for an earnings short squeeze. Just remember that it increased the probability of a higher move if the stock trends up into the report on solid volume.

In addition to its short interest, Research In Motion has also attracted some important bulls to the stock lately. Holders include

Eminence Capital

, which increased its position in the stock by more than 25% in the most recent reporting period, and Prem Watsa at

Fairfax Financial

, who established a new position in Research In Motion. The stock was also included in the

10 Winning Tech Stocks

portfolio after Blaylock Robert Van analyst Joel Achramowicz said he liked it.

Another potential earnings short squeeze trade is

Pier 1 Imports

(PIR) - Get Report

, also due to report its results on Thursday. This company operates as an importer and specialty retailer of imported decorative home furnishings and gifts in the U.S., Canada and Mexico. For the last three months, this stock has been uptrending nicely, with shares up around 32%. Wall Street analysts are looking for revenue to come in between $330.30 million and $356 million.

On Dec. 2, Pier 1 reported that third-quarter comparable-store sales rose 10.2% compared with the same period last year, which was a tad bit better than the company had predicted last month. This should bode well for the current quarter as long as Pier 1 can deliver on earnings and issue some positive forward guidance. Judging by the decent results reported on Black Friday -- which saw sales of $45 billion vs. the $41.2 billion and $41 billion consumers spent during the same period the last two years -- Pier 1 should be able to deliver for the current quarter.

The current short percentage of the float for PIR sits at around 12.9% as of the most recent reporting period of Nov. 30. That means that out of the 98 million shares in the tradable float, around 12.7 million shares are currently sold short by the bears. This is a large enough short interest and small enough float to produce a massive squeeze higher. Keep in mind that the shorts have increased their bets from Nov. 15 by around 111,704 shares.

From a technical standpoint,

shares of Pier 1 are in a solid uptrend

that shows a stock making higher highs and higher lows since late August. The stock has also recently broken out above some previous overhead resistance at around $10.25 a share. If you see this stock move above the next resistance level at around $11 a share, then the probability for a big short squeeze should increase dramatically. As long as we don't see big volume down days before the company reports that eclipse the three-month average volume of 2.7 million, then I like the chances here with PIR for a bear short covering rally.

One more stock that could be setting up for a big earnings short squeeze is

Finish Line

(FINL)

, which is set to report next week. This company engages in the retail of athletic casual footwear, apparel and accessories for men, women and kids under the Finish Line brand name. The stock has been in a solid uptrend the last three months. with shares up 23%, and is just one point off its

52-week high

of $19.48. Wall Street analysts are looking for revenue to come in between $242.20 million to $255 million for the current quarter.

As of Nov. 30, the current short interest as a percentage of the float for FINL is a rather large 11.3%. That means that out of the 50.57 million shares in the tradable float, around 5.81 million shares are currently sold short by the bears. Again, this low-float and high-short-interest situation has the capability of producing large moves higher if the bears are forced to cover their bets.

So why do I like Finish Line for an earnings short-squeeze play? It's pretty simple. Just take a look at the results that competitor

Foot Locker

(FL) - Get Report

reported on Nov. 18, which included a profit of $52 million, or 33 cents a share, compared with a year-earlier loss of $6 million, or 4 cents a share, that produced a large writedown. Following that solid report, shares of Foot Locker soared by 10% in afterhours trading, and overall, the stock rose from around $16 to a high of close to $20 a share. I think Finish Line is about to do the same thing, if the demand for footwear is as strong as Foot Locker's results indicate.

From a technical standpoint, watch for Finish Line to break out above some previous overhead resistance at around $19.50 a share. I will especially love a move above that level that comes on strong volume that easily comes in above the three-month average daily volume of 1.1 million shares. I think Finish Line is one you can play for a quick pop that, like Foot Locker, could produce a 10% return. Keep this name on your trading radar as its earnings report approaches.

To see more potential earnings short squeeze candidates, including

General Motors

(GM) - Get Report

,

Joy Global

(JOYG)

and

Piedmont Natural Gas

(PNY)

, check out the

Earnings Short Squeeze Plays

portfolio on Stockpickr.

-- Written by Roberto Pedone in Winderemere, Fla.

RELATED LINKS:

>>Do 7 Hot Gifts Make for 7 Hot Stocks?

>>Technical Setups for the Week

>>How to Trade This Week's Earnings

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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.

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.

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