WINDERMERE, Fla. (Stockpickr) -- Buying the right stocks that are heavily shorted into their earnings reports continues to be a profitable venture this earnings season.Last week, two of three earnings plays I highlighted produced some big gains for the bulls. Both Aruba Networks (ARUN) and SunPower (SPWRA) traded significantly higher and experienced notable short squeezes following their earnings reports. Both companies delivered what the bulls were looking for, rewarding any trader who took a long position in these names prior to their reports.
Aruba Networks was trading at around $26 a share when the article came out, and following its earnings report, the stock soared to a high of $31.65. SunPower jumped from $16.50 a share before their report to a high of $19.88 hit last Friday. The only disappointment was
, which dropped from around $59 a share prior to the report to a low of $52.68 a share on last Friday.
Two out of three is not bad at all, especially when you consider how much the two winners advanced. Had you played either Aruba Networks or SunPower from the long side, you would have seen for yourself how profitable trading an earnings short squeeze play can be. Both of these stocks possessed qualities I look for in a good earnings short squeeze candidate, including a high short interest, an uptrending stock ahead of the report and the chance for solid fundamental news.
Before we take a look at some potential earnings short squeeze trades, let's go over the basics. 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.
Here's a look at a
when they report earnings.
My first idea for an earnings short squeeze trade is
, which is scheduled to report its results on Thursday after the market close. This company designs, manufactures and sells solar electric power modules using a proprietary thin film semiconductor technology. First Solar is off to a hot start in 2011, with shares up around 28%. Wall Street analysts are expecting the company to to report revenue in a range of $612 million to $774.20 million and earnings per shares of $1.57 to $2.20. These are some very wide ranges in analysts' expectations, so if First Solar does beat the Street, I think the stock will soar.
Once again, I am going to go back to the same reason that I liked solar play SunPower prior to its earnings report, which is that I think rising oil prices are moving consumers and corporations towards alternative energy solutions rapidly. First Solar is the world's largest maker of thin-film solar-power modules, and the company has been the focus of a number of bearish articles lately, including
that said the stock could drop 20% to 25% if European subsides for solar energy disappear. That might eventually play out, but if the shorts are pressing their bets ahead of the coming quarter off this thesis, they might be disappointed.
The current short interest as a percentage of the float for FSLR is an extremely large 27.6%. That means that out of the 65 million shares that are available for trading, 15.26 million shares are currently sold short by the bears as of Jan. 31. This sets the stock up nicely for a big short squeeze since the short interest here is so high and the tradable float is relatively low.
From a technical standpoint, FSLR has a ton of support at around $165 and at $155 a share. As long as the stock doesn't trade below $155 prior to their earnings report, then I think this name is a worth a shot from the long side heading into the report.
increased its position in First Solar by 65.3% in the most-recent quarter, to 732,343 shares. The stock comprises 3.7% of the total GIM portfolio. I recently highlighted the stock as one of
Another stock that looks good for an earnings short-squeeze play is
, which is due to report its results on Wednesday after the market close. This company engages in the design and development of digital wireless technologies for use in cellular and wireless IEEE 802 related products. This is another name that's off to a hot start in 2011, with shares up around 35%. Wall Street analysts are looking for revenue to come in between $93 million and $96.04 million and for earnings per share of 76 cents to 81 cents.
This is a cash-rich company that currently has over $560 million in cash on its book and very little long-term debt. Shares of InterDigital are cheap, trading at just 15 times earnings and around 18 times forward earnings. If this company can report a solid number and show some strong growth metrics, then the market is going to ramp this stock and crush the shorts because the shares are far from overvalued for a high-tech company.
The main reason I am optimistic for a strong quarter out of InterDigital is due to the
, which has driven strong growth for smartphones and tablet computers. InterDigital is a leading developer of wireless technologies and the company has licenses with man of the top wireless players around the globe.
The current short percentage of the float for IDCC is a notable 16.9%. That means that out of the 43 million shares in the tradable float around 7.3 million shares are currently sold short by the bears as of Jan. 31. Once again, this is another heavily shorted stock with an extremely low float that can produce monster sized gains if the company can deliver what the bulls are looking for.
From a technical standpoint, shares of IDCC are uptrending nicely with the stock just a few points off of its 52-week high of $58.64. The stock is a bit extended past its 50-day moving average of $47.48 a share, so if we get any weakness ahead of the report I would look to get long this name for an earnings short squeeze play. Look for the confirmation of the short squeeze once the stock takes out that 52-week high price following the report.
With an A- buy rating from TheStreet Ratings, IDCC is one of the
One more stock that could be setting up for a large earnings short squeeze is
, which is due to report earnings on Thursday after the market close. This company is an independent exploration, development and production firm that utilizes advanced exploration, drilling and completion technologies to systematically explore for, develop and produce domestic onshore oil and natural gas reserves. The stock is off to a solid start in 2011 with shares up around 20%. Wall Street analysts are looking for revenue to come in between $56.51 million to $71.50 million and for earnings per share to be in a range of 10 cents to 27 cents.
My thesis for loving this energy play into its earnings report is pretty simple: We're in a perfect storm for energy companies leveraged to oil prices due to the unrest in the Middle East. What makes Brigham Exploration so attractive is that they focus primarily on domestic exploration, so theoretically it shouldn't be seeing any slowdown in business due to the political uprising sweeping across the Middle East. In fact, its domestic focus should be increasing demand for their services and expertise.
This stock is far from cheap with shares trading at around 30 times forward earnings. However, that premium is mostly due to its lack of overseas exposure and due to the tremendous upside of the booming fields in the Williston Basin, where it has significant drilling interests. The company has already announced that it plans to raise its fourth-quarter production to take advantage of strong drilling demand in the Williston basin which is located in North Dakota and Montana. This could mean that the current quarter is going to be a very strong one.
As of Jan. 31, the current short interest as a percentage of the float for BEXP is a notable 8.3%. That means that out of the 113.72 million shares in the tradable float around 9.43 million shares are currently sold short by the bears.
From a technical standpoint, BEXP is in a very strong uptrend with shares just a few points off its 52-week high of $34 a share. Also, the stock recently broke out above some past overhead resistance at around $31 a share. This bodes well technically for the stock to continue to advance higher and possibly see a large short squeeze if the company can report some bullish earnings numbers. As long as the stock can stay above some past overhead resistance at $28 to $29 a share, which has now turned into a support level, then the stock has a high probability of a short squeeze.
Brigham Exploration was one of the
To see more potential earnings short squeeze candidates, including
, 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.