WINDERMERE, Fla. (Stockpickr) -- Taking a long position in a heavily shorted stock ahead of the company's earnings can produce big gains for the bulls if the short-sellers capitulate and cover their bearish bets. That's exactly what unfolded with two of my three earnings short squeeze picks last week.
Men's tailored clothing maker
Jos. A Bank Clothiers
, which is famous for its "buy one, get one free" advertising promotions, posted record profits and sales, and the stock took off. On March 29, the stock was trading at around $47 a share. Following the March 31 earnings report, shares of Jos. A Bank Clothiers hit a high of $52.50. That's not a huge gain, but a profit of around $5.50 a share in a very short time frame is nothing to sneeze at.
Irrigation systems player
was my other earnings short-squeeze trade winner, after the company reported second-quarter revenue of $120.2 million compared with Wall Street estimates of $109.8 million. Lindsay said its quarterly results beat the market due to strong demand for its irrigation systems in the U.S. and worldwide. On March 29, the stock was trading at around $75, and following the report, the stock high a high of $85.87 a share.
My only loser last week was
Krispy Kreme Doughnuts
, which traded down by around 20% after the company said it had swung to a loss in its fiscal fourth quarter. Kripsy Kreme actually saw good volume on the day it was set to report, and the stock was even breaking above a descending trend line, but the technicals weren't enough to save this stock. The company flat out blew it, and the stock was punished.
Now the stock is trading right at its 200-day moving average $5.46 a share. If you want to own it, you can buy it here with a mental stop just below this key level. A mental stop means not placing a physical stop order with your broker but instead just selling it when it hits an area you want to get out at.
If you're going to trade an earnings short-squeeze candidate, make sure you're only using risk capital and that you're prepared to cut your losses quickly in case the trade doesn't work out. You'll also need to be prepared to trade outside of regular trading hours because that happens to be when most earnings reports are released.
Before we take a look at some potential earnings short-squeeze candidates, 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 have 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 number of
, including a long, a short and a few heavily shorted stocks that could experience a big squeeze.
My first earnings short squeeze play is
, which is scheduled to report its results on Wednesday after the market close. This company, together with its subsidiaries, develops, operates and franchises casual dining restaurants in the U.S., Puerto Rico, Guam and internationally. Wall Street analysts, on average, expect the company to report revenue of $319.80 million on earnings of 31 cents per share.
Casual dining stocks aren't exactly loved by the Street right now, especially with high oil prices causing pain for consumers at the pump. However, it's probably going to take a few quarters of oil trading above $100 a barrel before that pain shows up in earnings. With that in mind, this quarter should be a decent one from Ruby Tuesday.
The current short interest as a percentage of the float for RT is 6.5%. That means that out of the 54.53 million shares that are in the tradable float, 3.2 million are currently sold short by the bears as of March 15. What's interesting here is that the shorts in RT have been increasing their bets from the last reporting period by 14%, or 211,738 shares. If these bears are caught leaning the wrong way, then we could see some solid short covering in RT following their report.
From a technical standpoint, I would like to see RT trading above its 50-day moving average of $13.28 prior to its report. If that happens, I then want to see the stock take out some near-term overhead resistance at around $13.40 to $13.60 on strong volume well above its three-month average trading activity of 680,000 shares. If that happens take a shot at RT from the long side, but if it falls below that 50-day I would stay away heading into the report.
Ruby Tuesday, which is one of
this week, was included on a list last month of
My next earnings short squeeze trade idea is
, which is set to report its results on Thursday before the market opens. This company engages in the design, manufacture and marketing of railroad freight car equipment in North America and Europe. Wall Street analysts, on average, expect Greenbrier to report revenue of $264.96 million on earnings of a loss of 1 cent per share.
My thesis for Greenbrier is that it should be benefiting from the commodity boom as companies turn to the firm for new railcars and shipping services. Emerging market growth should also be in play here for its European division, which serves continental Europe and the United Kingdom. It's also possible that the company could forecast some higher growth for its railcar business due to the massive earthquake that hit Japan. Lots of materials are going to need to be shipped around the world to
. That's where Greenbrier could benefit going forward.
The current short interest as a percentage of the float for GBX is a decent 6.2%. That means that out of the 20.82 million shares in the tradable float, 1.4 million are currently sold short by the bears as of March 15. The bears have also been increasing their bets from the last reporting period by a whopping 41%, or 410,000 shares sold short.
From a technical standpoint, GBX is looking very strong going into the report, with the stock trading just 2 points off its 52-week high of $30.38 a share. If the stock can hold above some near-term support at $26.50 a share going into earnings, then I would take a shot from the long side. I would add heavily to that long position if it breaks out above the 52-week high following the report.
Another strategy you could use is to simply wait until after the report and only go long if it breaks out above $30.38. Keep in mind that some big volume has been moving into this name during the past few trading sessions, so this stock is already starting to heat up.
Another earnings short-squeeze candidate is
, which is due to report results on Wednesday after the market close. This company, together with its subsidiaries, operates a chain of stores that provides automotive repair and maintenance services and sells automotive tires, parts and accessories in the U.S. and Puerto Rico. Wall Street analysts, on average, expect Pep Boys to report revenues of $481.44 million on earnings of 5 cents per share.
This stock is probably the riskiest earnings trade I am going to highlight since the auto parts sector has struggled of late. Some of the reasons that the sector has had issues are because investors think that the recent rebound in new car sales could hurt auto parts stocks. I am not so sure that's going to be the case, though, because that uptick in new car sales is coming off of such depressed levels. Let's face it, the economy is still relatively weak, and that should bode well for PBY's earnings.
The current short interest as a percentage of the float for PBY is a notable 6.2% as of March 15. That means that out of the 46.63 million shares in the tradable float, 3.2 million are currently sold short by the bears. This is another name that the bears have been increasing their short bets on recently. Shares sold short jumped by 17.6%, or 479,700 shares, from the last reporting period, so a large short squeeze could develop if PBY can deliver solid results.
From a technical standpoint, I would love to see Pep Boys trade above its 50-day moving average of $13.01 heading into earnings. A move above that level on volume well above the three-month average trading activity of 685,000 shares should bode well for a chance at an earnings short squeeze. I would add heavily to this position if the stock takes out $14 and then $14.70 a share. I would avoid this earnings play if the stock fails to get reasonably above that 50-day ahead of the report.
As of the most-recently-reported period, Pep Boys comprised 4.7% of the
Though not a short squeeze candidate, another stock that I like for an earnings trade is
, which is set to report its results on Thursday before the market opens. This is a wine company with a market position in each of its core markets, which include the U.S., Canada, the United Kingdom, Australia and New Zealand. Wall Street analysts, on average, expect Constellation Brands to report revenue of $731.54 million on earnings per shares of 26 cents.
This stock isn't heavily shorted (2% of the float), but it's looking very strong technically heading into its report. During the last two trading sessions, volume of 2.3 and 2.9 million shares changed hands (both up days) compared with the three-month average trading volume of 1.9 million shares. I would play this stock form the long side if it takes out $21 a share on strong volume.
Constellation Brands was highlighted last month as one of
as well as one of
Bed Bath & Beyond
Switching gears a bit, one stock I would consider shorting in front of its earnings is
Bed Bath & Beyond
, which is set to report on Wednesday after the market close. This company, together with its subsidiaries, operates a chain of retail stores. Wall Street analysts, on average, expect Bed Bath & Beyond to report revenue of $2.39 billion on earnings per shares of 97 cents.
This retailer is heavily tied to the housing market since it sells so many products that are for home furnishing, and recent housing statistics have been anything but bullish. I actually expect the current quarter to be a decent one from BBBY, but I am worried about future guidance. My concern here is that consumers are putting off housing-related purchases due to rising energy costs and due to the fact that they're staying out of the housing market in general.
From a technical standpoint, I would short this stock going into the report as long as it's trading below its 50-day moving average of $48 a share and below $49.20, its nearest overhead resistance level. The only way I would buy this stock is if it breaks out to new highs above $51 a share after it reports, but not before.
Bed Bath & Beyond shows up in various Stockpickr professional portfolios, reflecting holdings as of the most-recently-reported quarter, including those of
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.