3 Earnings Short-Squeeze Plays
The market is on fire, and if you're a bear selling stocks short, you can't be very happy with the overall price action on the tape. The Federal Reserve has decided to mandate that stocks must go higher, and they're printing dollars at a feverish pace to make sure it happens.
The Fed is using a process called quantitative easing to flood the markets with tons of liquidity, which is in turn sparking traders to put on the "risk trade," whereby they purchase the most risky assets (equities) instead of safer asset classes such as bonds. Basically, the Fed is making it impossible for any investor to be in cash or in any asset that doesn't generate alpha.
This quantitative easing process, now QE2, has managed to push the major stock indices to hit new yearly highs. Fighting the tape for the shorts just isn't working.
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Of course, nothing on Wall Street lasts forever, but for now I think it's prudent to continue to look for stocks that have a good chance of experiencing big short squeezes going into the their earnings report.
This is a strategy that has worked in spades so far this earnings season with stocks such as
Netflix
(NFLX) - Get Report
,
Chipotle Mexican Grill
(CMG) - Get Report
and
Decker's Outdoor
(DECK) - Get Report
. I think this earnings short-squeeze trend will continue to play out as long as the market remains in an uptrend.
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.
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Here's a look at a few stocks that could experience
big short squeezes when they report earnings
.
One stock that could see a big short squeeze going into earnings is
A123 Systems
(AONE)
. This company designs, develops, manufactures and sells rechargeable lithium-ion batteries and battery systems, and provides research and development services to government agencies and commercial customers.
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A123 Systems is set to report earnings on Nov. 9 after the market close. Wall Street analysts are looking for revenue in a range of $24.8 million to $29.40 million. If the company can report revenue toward the high-end of that range and, more important, if it can issue bullish guidance for the next quarter, then the stock could see a very powerful short squeeze.
The current short interest as a percentage of the float for A123 Systems sits at a huge 19%. That means that out of the 79.75 million shares in the tradable float, 15.2 million shares are sold short as of Oct. 15. This is a very large short interest for such a low tradable float, so this stock could jump over 20% in a heartbeat off of a solid earnings report.
I fully expect A123 Systems to start trading higher prior to earnings report as the shorts start to cover some of their positions. From a technical perspective, this stock has near-term support around $9 a share and some overhead resistance sits at around $11.20 to $11.50 a share.
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Traders can either look to play this stock for a short squeeze run-up prior to the report or hold the stock into the report for a potential bigger pop. Of course, holding it into earnings is more risky, and I wouldn't bet the farm on any earnings play.
Another potential earnings short squeeze play is
Jamba
(JMBA) - Get Report
. This company, through its subsidiary, Jamba Juice Company, owns and franchises Jamba Juice stores in the U.S. and the Bahamas.
Jamba is due to report earnings on Nov. 9 after the market close. Wall Street analysts are looking for revenue to come in at $64.30 million to $66.40 million. If Jamba can deliver results that Wall Street likes and issue some favorable guidance, then the stock could see a short squeeze develop.
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What's interesting about Jamba is that the stock is up 42% year-to-date but is well off its highs of around $3.70 a share that it hit back in April. The current short percentage of the float for Jamba as of Oct. 15 stands at 7.1%. The shorts have even increased their position from the last reporting period on Sept. 30 by 195,865 shares, so what we have here are some bears who are pressing their bets. With a tradable float of just 57.54 million shares, that means around 3.65 million shares are currently sold short.
Once again, we have a situation with a notable short interest on a stock with a very low float. This is the type of setup that can produce a very big short-term return because of the tight supply of shares and large short interest. From a technical perspective, shares of Jamba have just started to move above the 200-day moving average of $2.33 a share. It looks like Jamba wants to make a run back toward some previous overhead resistance at around $2.80 going into their earnings report.
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If the stock can breakout above that overhead resistance level, then I expect it to make a run at $4 a share as the shorts start to throw in the towel. This is definitely one name worth watching going into their earnings report.
One more name that could see a massive short squeeze going into their earnings report is
Nvidia
(NVDA) - Get Report
. This company provides visual computing technologies that generate interactive graphics on workstations, personal computers, game consoles and mobile devices.
Nvidia is set to reports earnings on Nov. 11 after the market close. For the current quarter, Wall Street analysts are looking for revenue of $830.22 million to $851.80 million. This is one stock that the bears have actually been right on this year, with shares off a whopping 33% year-to-date.
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But that winning bear trade might be about to get crushed as the stock approaches the earnings announcement. Technically the stock is starting to break out above some previous overhead resistance at around $12.36 a share. A break above the 50-day moving average of $13.18 would really start to get the bears nervous, and with shares trading around $12.47 right now, that price point is not far away.
As of Oct. 15, the current short percentage of the float for Nvidia sits at 5.8%. That means that out of the 550.71 million shares in the tradable float, about 31.74 million are currently sold short. If an earnings short squeeze does develop here for Nvidia, then the stock has a strong chance of making a run back towards $15 to $16 a share.
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I would also like to note that the
Semiconductor Holders
(SMH) - Get Report
is starting to break out to a new
and brand new two-year highs. This strength in the chip sector overall could easily help to push Nvidia much higher as the company's earnings report approaches. It looks like the chances for a short squeeze here are pretty good, so keep this name on your radar.
To see more potential earnings short squeeze candidates, like
Dick's Sporting Goods
(DKS) - Get Report
,
RINO International
(RINO)
and
Urban Outfitters
(URBN) - Get Report
, check out the
portfolio on Stockpickr.
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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.
