WINDERMERE, Fla. (Stockpickr) -- With earnings season underway on Wall Street, it's time for market-players to create a powerful watch list of stocks due to report numbers that are also heavily shorted by the bears.
Short-sellers hate being caught short a stock that produces earnings that please the bulls. When this happens, we often see tradable short squeezes develop as the bears rush to cover their positions to avoid big losses. Even the best short-sellers know that it's never a great idea to stay short once a bullish earnings report sparks a big short-covering rally.
This is why I scan the market for heavily shorted stocks that are about to report earnings. You only need to find a few of these stocks 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 that you manage your risk accordingly. Sometimes the best play is to wait for the stock to break out following the report before you jump in to profit off a short squeeze. This way, you're letting the trend emerge after the market has digested all of the news.
Of course, sometimes the stock is going to be in such high demand that you risk missing a lot of the move. That's why it can be worth betting prior to the report -- but only if you have a very strong conviction that the stock is going to rip higher, and its acting extremely bullish technically.
Here's a look at a number of
when they report earnings this week.
Sirius XM Radio
My first earnings short-squeeze idea is satellite radio player
Sirius XM Radio
, which is set to report its numbers on Tuesday before the market open. Wall Street analysts, on average, expect Sirius XM Radio to report revenue of $764.24 million on earnings of 1 cent per share.
This company has reported an increase in revenue for four straight quarters. Revenue jumped by 6.4% in the second quarter, 9% in the first quarter, 8.8% in the four quarter of last year and 16% in the third quarter or last year. Strong auto sales in September should bode well for Sirius as we head into the quarter, so a solid report and guidance could set off a tradable short squeeze.
The current short interest as a percentage of the float for Sirius XM Radio is worth mentioning at 6.4%. That means that out of the 3.68 billion shares in the tradable float, 252.30 million are sold short by the bears. This isn't a huge short interest, but it's more than enough to spark a rally of 10% or more if we get a bullish report.
, this stock is currently trading above its 50-day
and below its 200-day moving average, which is neutral trendwise. This stock sold off hard from its July high of $2.35 to its recent low of $1.27 a share. After hitting that low, the stock has rebounded to above $1.80, and it now sets up to breakout post-earnings.
If you're bullish on this stock, I would look to jump in long after they report their results if the stock trades above some past overhead resistance at its 200-day of $1.88 to $1.95 a share on strong volume. Look for volume that's tracking in close to or above its three-month average action of 86.56 million shares.
If we get that breakout post-earnings, then look for this stock to challenge $2.35 or even its 52-week high of $2.44 a share. I would simply avoid getting long SIRI if the stock fails to trade back above its 200-day moving average after earnings, or if it drops below its 50-day of $1.71 on heavy volume.
Sirius, one of the
, showed up on list last month of
Another potential earnings short-squeeze trade is biopharmaceutical company
, which is set to report results on Thursday after the market close. This company focuses on developing and commercializing hospital specialty products. Wall Street analysts, on average, expect Optimer Pharmaceuticals to report revenue of $5.44 million on a loss of 52 cents per share.
What I like about this stock is that it's trading within a range as we head into the quarter. A break outside of that range between $12.40 and $15.40 a share will set this stock up for its next big trend. If we get some bullish news, then the break outside of the upper end of the range could spark a big short squeeze.
The current short interest as a percentage of the float for Optimer is a rather large 16.2%. That means that out of the 39.86 million shares in the tradable float, 6.83 million are sold short by the bears. It's worth mentioning that the bears have been increasing their bets from the last reporting period by 5.4%, or by about 346,700 shares.
From a technical standpoint, this stock is currently trading above its 50-day and 200-day moving averages, which is bullish. This stock made a monster run from its August low of $6.81 to a recent high of $17.95 a share. After hitting that high, the stock sold off hard to its current level of $14.40 a share.
If you're bullish on this name, I would wait until after they report and buy the stock once it breaks out above $15.40 a share on big volume. Look for volume that's tracking in close to or above its three-month average action of 1.25 million shares. I would add aggressively to any long position once the stock then takes out its 52-week and all-time high of $17.95 with volume.
I would only get short this stock after they report earnings if it drops below its 50-day moving averageof $12.94 and 200-day of $12.17 with big volume. A
below those levels could easily set this stock up to drop to $9 a share or even lower, if the bears hammer this post-earnings.
An earnings short-squeeze idea in the medical equipment and supplies sector is robotic arm and orthopedic implants maker
, which is set to release numbers on Wednesday after the market close. Wall Street analysts, on average, expect Mako Surgical to report revenue of $19.40 million on a loss of 22 cents per share.
This stock has been blazing a trail in 2011 with shares up by over 154%. The stock is also trending very strong heading into the quarter with shares just four points off its
and all-time high of $43. Any bullish earnings news and this stock could easily see a monster short-squeeze following their report.
The current short interest as a percentage of the float for Mako Surgical is an extremely large 24.3%. That means that out of the 31.71 million shares in the tradable float, 7.53 million are sold short by the bears. The short-sellers have also been increasing their bets from the last reporting period by 5.3%, or by about 380,500 shares. If the bears are caught pressing their bets too much into the quarter, then this stock is going to skyrocket.
From a technical standpoint, this equity is currently trading above both its 50-day and 200-day moving averages, which is bullish. This stock has been uptrending nicely since August with shares making mostly higher lows and higher highs. The stock now sets up for a big breakout if it can manage to move above $43 a share.
The way I would play this stock is to wait until after they report and buy the stock if it takes out $40 to $43 share with strong volume. Look for volume that's tracking in close to or above its three-month average volume of 1.10 million shares. If those levels are taken out, then I expect this stock to soar by over 10% post-earnings. I am mentioning $40 because it could begin the breakout by moving over that level from its current price of $38.74. That said, $43 is the big trigger to new all-time highs.
I would only get short this stock after they report earnings if it drops below its 50-day moving average of $36.64 a share on heavy volume. I would target a drop back towards $30 a share, or possibly even the 200-day moving average of $28.07 a share, if the bears smack this lower post-earnings.
Mako shows up on a list of the
True Religion Apparel
An earnings short-squeeze play in the apparel and accessories complex is high-end apparel stock
True Religion Apparel
, which is set to release numbers on Tuesday after the market close. Wall Street analysts, on average, expect True Religion Apparel to report revenue of $107.19 million on earnings of 49 cents per share.
This stock is trending very strong heading into the quarter with shares trading very close to its 52-week high and all-time high of $34.92 a share. This strong trend
if the company can post solid results and issue bullish guidance.
The current short interest as a percentage of the float for True Religion Apparel stands at 8.2%. That means that out of the 24.07 million shares in the tradable float, 1.98 million are sold short by the bears. This is a low-float stock with a more than enough short-sellers to spark a solid short-covering rally on any bullish news.
From a technical standpoint, this stock is currently trading above both its 50-day and 200-day moving averages, which is bullish. The stock hit a double bottom in October at around $25 a share, and since then it has rallied up to its current price of $35.55. Traders should now look for a post-earnings breakout to new highs as a signal to get long for a short squeeze.
The way I would play this name is to wait until after they report their results and buy the stock if it trades over $35 a share, or simply prints new all-time highs on solid volume. Look for volume that's tracking in close to or above its three-month average action of 442,900 shares.
I would only short this name after they report if the stock drops below $33 a share on big volume. I would then add to any short position once the stock then takes out some support at $29.58 with volume. Target a drop back towards the 200-day moving average of $27.
True Religion was also featured in "
" and shows up on a recent list of
Dunkin' Brands Group
My final earnings short-squeeze candidate for today is coffee franchisor of quick service restaurants
Dunkin' Brands Group
, which is set to release numbers on Tuesday before the market open. Wall Street analysts, on average, expect Dunkin' Brands Group to report revenue of $159.23 million on earnings of 25 cents per share.
This company just went public about a month into the third quarter, so investors will want to see what their plans are for achieving high growth and consistent profitability. What's great about this stock heading into earnings is that shares have been basing between $25 and about $30 since their IPO. A move outside of that range should setup the stock for a big move post-earnings.
The current short interest as a percentage of the float for Dunkin' Brands Group is pretty high at 13.8%. That means that out of the 27.06 million shares in the tradable float, 3.56 million are sold short by the bears. It's worth pointing out that the bears have been increasing their bets dramatically from the last reporting period by 21.9%, or by about 639,100 shares. This large increaser could have the bears leaning too hard short into the report.
From a technical standpoint, this stock hasn't been trading long enough to develop much of trend since it just came public in August. That said, the stock has been trading sideways between $25 and around $30 a share heading into the report. Traders should look to play the breakout either way of this well defined range.
If you're bullish on this stock, I would wait until after they report and jump in long once the stock breaks out above $30 and then $32 a share on heavy volume. Look for volume that's tracking in close to or above its three-month average action of 1.6 million shares. If we get that breakout, I expect this stock to spike well over 10% on a solid short-covering rally.
I would only get short this stock after earnings if it trades below $25 a share on heavy volume. A drop below that level and we are going to easily see a big selloff since there is no previous support where technical traders will come in to buy the stock.
To see more potential earnings short squeeze plays, 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.