
3 Earnings Short-Squeeze Stocks
WINDERMERE, Florida (Stockpickr) -- Nothing makes me happier than when a great earnings short-squeeze trade comes together to produce huge returns.
When the stars align and the shorts are caught leaning the wrong way into earnings, it can produce big-percentage moves that you just don't see every day on Wall Street. This is why I scan the market feverishly for the best possible earnings short-squeeze trades. I like to find a number of stock candidates that have the potential for an earnings short squeeze, and then I watch these stocks closely as their earnings dates approach to see if they have sustainable buying momentum. I don't want to see a stock that is trading weakly or breaking key moving averages like the 50-day or 200-day prior to a report because that's a technical warning sign that the stock could be due for a fall.
The stronger the stock acts as the earnings date approaches, the better the chances are for the shorts to get squeezed out of their bearish bets. Even more important, the stronger that a stock has been acting over a longer period of time makes an earnings short squeeze even more probable. This has been demonstrated this earnings season by the large short squeezes we've seen in market leaders such as
Priceline.com
(PCLN)
,
Dick's Sporting Goods
(DKS) - Get Report
and
Netflix
(NFLX) - Get Report
. These stocks have been leading the market and acting with strength on a regular basis, so it came as no surprise to me that they gapped up big following strong earnings reports. As the old trading adage goes, "The trend is your friend."
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The most recent market leader that experienced a notable earnings short squeeze was
Salesforce.com
(CRM) - Get Report
. After the market closed on Nov. 18, Salesforce.com reported a sold third quarter that saw an increase in total revenues by 30% on a year-over-year basis. This bullish report sent the bears scrambling to cover their short positions, and the stock gapped up from around $116 a share (its closing price on Nov. 18) to around $136 a share, which was the closing price for the following day.
Often what's great about an earnings short squeeze trade is that the stock continues to trade higher following the company's report. Currently, Salesforce.com is trading near $142 a share, and the stock's 52-week high was hit Monday at over $146 a share.
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As you can see, these successful earnings short-squeeze trades can produce big gains that last, with various strategies available to traders to help capture those gains. One strategy is to wait until after a company reports and buy the stock or call options to play a move higher. You can also buy prior to the report with a small position and then add to that position if the stock moves the right way once the earnings are announced.
Before we take a look at some potential earnings short-squeeze trades, let's review the idea of a short squeeze. 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 a stock short are forced to cover their positions as the stock rises to avoid further losses.
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Here's a look at a number of stocks that could experience a
big short squeeze when they report earnings
.
My top idea for an earnings short-squeeze play right now is
Lululemon Athletica
(LULU) - Get Report
, a designer and retailer of technical athletic yoga-inspired apparel primarily in North America.
This stock has been a serial outperformer this year, with shares up nicely by 78%. Lululemon Athletica is set to report earnings on Dec. 9 before the market opens. Wall Street analysts are looking for Lululemon to report revenue in a range of $155 million to $162.20 million. I have a good feeling that LULU is going to be able to hit the top end if this range and issue bullish guidance.
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I am confident that Lululemon can produce strong results because the company sells into a niche market that caters to affluent consumers. The company's yoga apparel is easily more expensive than competitors' products, but consumers continue to buy Lululemon's gear because they like the quality and feel of the clothing. I think by now we all know that even during tough economic times, affluent consumers don't change their spending patterns very much. To wit, note the recent strong results from
Coach
(COH)
,
Tiffany's
(TIF) - Get Report
and
Polo Ralph Lauren
(RL) - Get Report
as evidence that the high-end consumer is spending.
Another catalyst that could give LULU a major boost going into earning is
Oprah Winfrey's recent endorsement
of the company's $98 relaxed fit pants on her annual "Favorite Things" episode, which aired last Friday. Oprah told her audience that the pants were universally flattering and could cut your rear end in half. That's a heck of an endorsement, and I will be shocked if this seal of approval from Oprah hasn't already spurred more sales. It's true that this endorsement might be a little late to show up in the third-quarter report, but what I have found with Oprah is that she usually isn't early to a trend. Remember, the stock is up 78% year-to-date, so clearly the company has been buzzing for some time now.
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The current short interest as a percentage of the float for LULU is a rather large 19.7%. That means that out of the 45.81 million shares in the tradable float, 9.14 million shares are currently sold short as of Nov. 15. This is a big short interest being bet against a very low amount of total shares available for trading -- the type of situation that can produce very big returns if a massive short squeeze does develop, since the supply and demand is so tight.
I like the chances for an earnings short squeeze trade here with LULU as long as I don't see any big-volume selling days that eclipse the three-month average daily volume of 1.2 million shares prior to the report. If I see any big volume down days that track in two or three times 1.2 million shares, then I would possibly change my mind.
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Another potential earnings short-squeeze play is
Ciena
(CIEN) - Get Report
, a provider of communications networking equipment, software and services that support the transport, switching, aggregation and management of voice, video and data traffic.
Ciena, due to report earnings on Dec. 9 before the market opens, has also been doing well this year, with shares up 38%. Wall Street analysts are looking for revenue to come in at $400 million to $410 million. If the company can report a strong result and bullish guidance, then we could see a short squeeze develop.
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In fact, Ciena has a very strong chance of a big short squeeze because it's is one of the most heavily short stocks in the market. The current short percentage of the float for Ciena as of Nov. 15 stands at a whopping 29.2%, with around 26 million shares of the 85 million-share tradable float currently sold short by the bears. Again, we have a low float with high short interest here that is very vulnerable to a large squeeze if the company can deliver.
Ciena should be benefiting from increased Internet traffic as more consumers move into the online world to make purchases and conduct transactions. The company should also be benefiting from increased spending in the telecom space as more consumers pick up mobile devices such as smartphones and tablet computers to use apps that suck up a lot of bandwidth. That increase in bandwidth use is right up Ciena's alley since the company sells equipment that transmits large amounts of gigabits at rapid speeds.
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From a technical standpoint, as long as Ciena can stay above the 50-day ($14.72) and 200-day ($14.75) moving averages prior to the earnings report, I like the chances here for a short squeeze. I would also like to point out that I would prefer the stock get above some near-term resistance at $15.55 and trade closer to its October high of around $16 a share for a short squeeze to develop.
My third name today that could see a decent short squeeze going into their earnings report is
Zumiez
(ZUMZ) - Get Report
, a mall-based specialty retailer of action sports related apparel, footwear, equipment and accessories operating under the Zumiez brand name.
To say this stock is a winner year-to-date is an understatement, with the shares up a magnificent 149%. This specialty retailer is set to reports earnings on Dec. 1 after the market close, and Wall Street analysts are looking for revenue to come in at $127 million to $136 million. Judging by the company's recent report of same-store sales growth of 21.5% for the four-week period ending on Oct. 30, I think we have a very good shot here for a bullish earnings call.
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As of Nov. 15, the current short percentage of the float for Zumiez stands at 16.9%. That means that out of the 30.6 million shares in the tradable float, around 3.57 million shares are sold short by the bears. This is once again a huge short position and a very low float of available shares for trading. When you have a low float and high short interest, it can act like a powder keg and result in explosive moves higher if the bears are caught off-guard when bullish fundamental news is reported.
From a technical standpoint, Zumiez is hitting
and is currently trading around $32 a share. As a dedicated trend follower, the last kind of stock I would ever want to be short is a stock that is making 52-week highs and trending up strongly like Zumiez is right now.
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To see more potential earnings short-squeeze candidates, including
Sigma Designs
(SIGM)
,
Aeropostale
(ARO)
and
Comtech Telecomm
(CMTL) - Get Report
, 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.









