WINDERMERE, Fla. (Stockpickr) -- News events have the power to create massive volatility in the market, and one thing that can move stocks substantially higher or lower is an earnings release. Take that one step further and combine a bullish earnings report with a stock that's heavily shorted, and you have the fuel that can ignite a large short squeeze in any stock.
Short-sellers hate being caught short a stock that announces bullish earning and forward guidance. When this happens, we often see a tradable short squeeze develop as the bears rush to cover their positions and avoid huge losses. Even the most skilled short-sellers know that it's never a great idea to stay short once a big short-covering rally starts that's sparked by an earnings event.
This is precisely why I search the market for heavily shorted stocks that are about to report earnings. You only need to find a couple of these candidates in a year to help enhance your portfolio returns -- the gains become so outsized in such a short timeframe that your profits add up quickly.
That said, let's not forget that stocks are heavily shorted for a reason, so you have to use trading discipline and sound money management when playing earnings short-squeeze candidates. It's important that you don't go betting the farm on these plays and manage your risk accordingly. Sometimes the best play is to wait for the stock to breakout following the report before you jump in to profit from off a short squeeze. This way, you let the trend emerge after the market has digested all of the news.
However, sometimes the stock is going to be in such high demand that you will miss a lot of the move. That's why it's only worth betting prior to the report if you have a very strong conviction that the stock is going to explode higher.
Here's a look at a number of
My first earnings short-squeeze candidate is
, which is set to report its results on Wednesday after the market close. This Internet-based service offers a range of personalized photo-based products and services for consumers to organize and print their digital photos. Wall Street analysts, on average, expect Shutterfly to report revenue of $71.24 million on a loss of 39 cents per share.
This stock is trending very strong heading into the quarter with shares about 5 points off its
of $66.70. A strong earnings report out of smartphone and tablet maker
(AAPL) last week could bode well for Shutterfly, as well, if it means that more consumers were using handheld devices to access its Web site and services.
The current short interest as a percentage of the float for Shutterfly is a rather large 10.9%. That means that out of the 32.80 million shares in the tradable float, 3.55 million are sold short by the bears. There are more than enough short-sellers in Shutterfly to cause a big short-covering rally if the company reports solid results and guides higher for the next quarter.
From a technical standpoint, shares of Shutterfly are trading above both its 50-day and 200-day
, which is bullish. The stock recently ran into some overhead resistance at $64.45 a share, and it found buying support at around $57.50.
If you want to play Shutterfly for long trade, I would buy this stock after it reports if you see it trade above $64.45 on heavy volume. Add to any long positions aggressively if you see the stock take out its 52-week high of $67.70. I would only short Shutterfly if you see shares drop below $57.50 and then $56.50 (50-day) following their earnings on big volume.
Shutterfly is one of TheStreet Ratings'
Another potential earnings short-squeeze trade is
, which is set to report results on Thursday after the market close. This company develops and commercializes pharmaceuticals for serious diseases and medical conditions. Wall Street analysts, on average, expect BioMarin to report revenue of $105.90 million on a loss of 11 cents per share.
If you're looking for a biotech that could short-squeeze big off of earnings, then BioMarin could be just the right one. What I love about this name heading into its report is that the stock is very close to a major breakout. Also, upside volume has been strong for the past two months as the stock has run from $25 to its current price of just over $30 a share. A number of upside volume days, including Tuesday, have produced volume that's been well above its three-month average of 831,000 shares.
The current short interest as a percentage of the float for BioMarin is a notable 7.9%. That means that out of the 110.47 million shares in the tradable float, 8.68 million are sold short by the bears. It's worth noting that the bears have been increasing their bets from the last reporting period by 9.5%, or by about 823,300 shares. If the bears are caught leaning the wrong way here, then we could see a short-covering rally ensue.
From a technical standpoint, shares of BioMarin are currently trading above both its 50-day and 200-day
, which is bullish. The stock is also basing inside of a consolidation pattern right now between $29.50 and $30.50 a share. A break either way out of this base is going to setup the next major trend for this stock. The way I would play BioMarin is to wait for them to report, then buy the stock if you see it breakout above $30.86 a share on
. If the stock breaks out post-earnings, then we could easily see the shorts cover since the stock will then be printing new 52-week highs. I would only short this stock if you see it trade below $29.50 following their earnings report. I would add to any short position below $28.50, which is the next major
BioMarin is one of the
, as of the most recently reported period.
Green Plains Renewable Energy
One earnings short-squeeze play in the chemical manufacturing sector is
Green Plains Renewable Energy
, which is set to release numbers on Wednesday after the market close. This company engages in the production, marketing, and distribution of ethanol and related distillers grains in the U.S. Wall Street analysts, on average, expect Green Plains to report revenue of $891.42 million on earnings of 9 cents per share.
I like this stock for an earnings short-squeeze trade based off its potential
and due to the fact this stock has a history of making decent moves following earnings reports. The potential for that volatility combined with a short interest and low-priced stock make this name worth watching this week.
The current short interest as a percentage of the float for Green Plains is an extremely large 17.7%. That means that out of the 20.66 million shares in the tradable float, 3.66 million are sold short by the bears. Such a large short interest and such a small float can create a supply-and-demand imbalance that spikes a stock significantly higher during a short squeeze.
From a technical standpoint, shares of Green Plains are currently trading below the 200-day
and above the 50-day moving average, which indicates the stock is neutral trend-wise. This equity recently put in a double bottom at around $10 a share and has run up into the report to its current price around $11.25 a share.
The way I would play this stock is to wait for Green Plains to report and then buy the stock if you see it trade above some near-term overhead
at $11.80 a share on heavy volume. A move above that level will also take the stock back above its 200-day moving average, which is technically a bullish sign. I would look for this name to make a run at the next significant resistance level at $12.80 if it spikes higher on
following its report. I would only short this name it if drops below $11 a share following the report, and add to that short if it trades below its 50-day moving average at $10.71 a share.
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An earnings short-squeeze play in the casino and gaming sector is
, which is set to release numbers on Wednesday before the market opens. This multi-jurisdictional gaming company is a diversified operator of 15 wholly owned gaming entertainment properties and one controlling interest in a limited liability company that operates Borgata Hotel Casino and Spa in Atlantic City, New Jersey. Wall Street analysts, on average, had expected Boyd Gaming to report revenue of $577.07 million on a loss of 2 cents per share.
The company reported a loss for the second quarter this morning due to higher preopening expenses and costs related to flooding along the Mississippi River. Boyd Gaming lost $3 million, or 3 cents per share, vs. a profit of $3.4 million, or 4 cents per share, from the same quarter a year ago. Net revenue was $574.4 million for the second quarter, which represents a decline of less than 1% from the same quarter last year.
The stock is off by about 1.5% this morning. The real driver for Boyd shares will come after the company's conference call when management releases their guidance for the next quarter. If it guides significantly higher, than a short squeeze could still develop.
The current short interest as a percentage of the float for Boyd is an extremely large 28.1%. That means that out of the 61.32 million shares in the tradable float, 15.67 million are sold short by the bears.
From a technical standpoint, shares of Boyd have just started to trade above both its 50-day and 200-day moving averages. The move above the 200-day, which happened on Tuesday, came on big volume of 2.8 million shares versus the three-month average volume of 1.9 million shares. The stock also broke out above some major near-term overhead resistance at $9.40 to $9.62 a share.
The way I would play Boyd is to buy this stock following their earnings report if it holds above $9.62 a share. I would add aggressively to any long positions once it takes out the next significant overhead resistance level at $10.40 to $11 a share. If those levels are taken out to the upside, then look for a possible test its 52-week high of $12.78 a share. I would only short Boyd following their earnings if the stock takes below $9 a share on big volume. Add to any short bets below its 50-day moving average of $8.79 a share.
Boyd shows up on a recent list of
One more earnings short-squeeze play is
, which is set to release numbers on Wednesday after the market close. This company develops, manufactures and sells products and services for genetic analysis to the life science research and clinical health care markets. Wall Street analysts, on average, expect Affymetrix to report revenue of $64.49 million on a loss of 4 cents per share.
Going into this quarter, Affymetrix has just started shipment of the sector's first FDA-cleared gene profiling reagents. However, back on July 7, the company forecasted a 9% drop in revenues for this period at $64 million to $65 million, versus Wall Street estimates of $75 million. This revenue miss is already priced into the coming quarter, so if Affymetrix guides higher for the next quarter, then the stock could trade significantly higher.
The current short interest as a percentage of the float for Affymetrix is a rather large 13.7%. That means that out of the 62.68 million shares in the tradable float, 8.57 million are sold short by the bears. This is a large enough short interest to produce to big spike higher for AFFX if the company does produce bullish guidance that the bulls on the stock like.
From a technical standpoint, shares of Affymetrix are trading below its 50-day moving average and above its 200-day moving average, which puts the stock in a neutral position trend wise. After that guide down back in July, the stock fell from $8 a share to its current price of around $6.50 a share. The near-term support zones on the stock sit at $6.40 to $6.20 a share and overhead resistance is at $6.90 near the 50-day and at $7 a share.
I would be a buyer of this stock following the report once it trades above $7 a share since that will put the big gap down from July into play between $7 and $8 a share. I would add to any long positions if you see Affymetrix take out its 52-week high of $8.16 a share on strong volume. I would only short this stock after they report earnings if shares fall below $6.20 on heavy volume and then add again below $5.43 a share which is the 200-day moving average.
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.