WINDERMERE, Fla. (Stockpickr) -- Earnings reports have the power to create big volatility in stocks, particularly when bullish numbers are reported for a stock that's heavily shorted. That fuel can ignite a large short squeeze in any equity. Short-sellers rush to cover their positions to avoid huge losses as investors react to the news and snap up the stock.
You only need to find a couple of these candidates in a year to enhance your returns -- the gains become so outsized in such a short timeframe that your profits add up quickly.
Don't forget that these stocks are heavily shorted for a reason, so you have to use trading discipline and sound money management when playing earnings short-squeeze candidates. Manage your risk accordingly. Sometimes its best to wait for the stock to break out, letting 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 when 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 play is
( WINN), which is set to report its results on Monday after the market close. This company operates as a food retailing company primarily under the Winn-Dixie banner. The company's stores offer grocery, meat, seafood, produce, deli, bakery, floral, health and beauty and other general merchandise items. Wall Street analysts, on average, expect Winn-Dixie to report earnings of 12 cents per share on revenue of $1.60 billion.
Barclays recently came out with a note where they maintained their overweight rating on this stock with a price target of $11 a share. Shares of Winn-Dixie have been beaten down big in front of the quarter, with the stock dropping from a July high of over $10 a share to its current price of around $7.30 a share. Value players are already stepping into the stock Monday ahead of the quarter with shares up over 10%.
The current short interest as a percentage of the float for Winn-Dixie is an extremely large 16.5%. That means that out of the 52.07 million shares in the tradable float, 8.6 million are sold short by the bears. This is a large short interest on a stock with a reasonably low float. If the company can report bullish earnings and guide higher, then a nice short-squeeze could develop post-earnings.
From a technical standpoint, shares of Winn-Dixie are currently trading below its 50-day moving average and right at its 200-day moving average. The stock recently found some buying support at $6.05 a share, which marks the second time in the last year the stock has found buying interest near that level.
I would look to buy this stock after they have reported earnings once it trades above its 50-day moving average of $8.02 on heavy volume. I would add to any long position once it takes out $9 a share, and target a run towards $10 a share if the bulls win the post-earnings battle. I would only short this stock after they report if the stock drops below $6 to $5.95 a share on heavy volume.
Another stock with the potential to see an earnings short-squeeze is
, which is set to release results on Tuesday after the market close. This company designs and markets branded dress shirts, neckwear, sportswear, footwear, and other related products worldwide. Wall Street analysts, on average, expect PVH to report revenues of $1.28 billion on earnings of 95 cents per share.
This company is on deck to potentially beat Wall Street estimates for the fifth consecutive quarter. If they do continue with that trend and also raise their guidance, then this stock could potentially make a large move post-earnings to the upside.
Barclays recently issued a note where they maintained their overweight rating and price target of $80 a share on this stock. A Barclays analyst said they expect revenue of $1.28 billion, representing top-line growth of 16.4% over the same period last year. They see a strong revenue increase of 25.8% and 10.1% for the Tommy Hilfiger and Calvin Klein brands.
The current short interest as a percentage of the float for PVH sits at around 4.2%. That means that out of the 60.20 million shares in the tradable float, 2.58 million are sold short by the bears. This isn't a huge short interest, but it's enough to spark a sharp rally if PVH can report a strong quarter and guide higher.
From a technical standpoint, this stock is trading below its 50-day moving average but above its 200-day moving average, which is neutral trendwise. The stock recently fell from a July high of $75.86 a share to a recent low of $51.15 a share. Since that low, the stock has rebounded sharply back up towards $64 a share.
I would only be a buyer of this stock after they report if it trades above its 50-day moving average of $66.09 on strong volume. Look for volume the following day that's on track to be near or greater than its three-month average action of 1.2 million shares. I would target a run back towards $73 or possible the 52-week high of $75.86 a share if the bulls win the battle post-earnings.
I would only short this stock if it drops below $60 a share after they report their results on strong volume. I would add to any short position if it then drops below $56 a share, and I would target a drop back towards that big previous support zone at $51 a share. One way to confirm that this stock is going to drop post-earnings is if it fails to clear the 50-day and then drops on big volume through its 200-day moving average of $64.34 a share.
One short-squeeze candidate in the specialty retail sector is
, which is set to release numbers on Tuesday before the market open. This company operates as a discount retailer of general merchandise in the southern, southwestern, midwestern, and eastern U.S. Wall Street analysts, on average, expect Dollar General to report revenues of $3.54 billion on earnings of 48 cents per share.
A company like Dollar General that offers discounted good should be thriving and succeeding easily in this current economic environment of slow growth and anemic job growth. This company missed Wall Street estimates last quarter after beating estimates during the prior two quarters. Net income has been trending up for the past three quarters and revenues have trended higher for the past four quarters.
If this company sees a move back into a recession for the U.S., then expect them to guide higher and for the stock to surge post-earnings as the shorts cover their bets. The current short interest as a percentage of the float for Dollar General is a notable 7.7%. That means that out of the 99.06 million shares in the tradable float, 7.66 million are sold short by the bears.
From a technical standpoint, this stock is currently trading above both its 50-day and 200-day moving averages, which is bullish. The stock has also just today started to break out above some near-term overhead resistance at around $33.30 a share.
One way to play this stock is to buy some out-of-the-money call options ahead of the quarter if you think this company is going to guide higher and attract some buyers. Since the stock is trending strong and not far off its 52-week high of $35.09, an options bet could pay off here. By playing the call options you risk will be defined to whatever you decide to put into the trade.
Another less risky way to play this is to simply wait until after they report and only buy the stock if it breaks out on solid volume. I would be a buyer once it trades above $35.09 on volume tracking close to or greater than its three-month average volume of 1.7 million. Keep in mind that $34 to $35 a share on this stock has marked tough resistance all year, so a breakout above those levels would be significant for the bulls.
I would only short this name if you see it drop below its 50-day moving average of $32.71 a share following their earnings report. I would add to any shorts if it then takes out its 200-day moving average of $31.30 a share, and target $29 or lower if the bears knock this lower post-earnings.
If you're looking for an earnings short-squeeze play in the financial services sector, then take a look at
, which is set to release numbers on Tuesday after the market close. This company, together with its subsidiaries, provides outsourcing services for designing and implementing private education loan programs to national and regional financial institutions, and educational institutions in the U.S. Wall Street analysts, on average, expect First Marblehead to report revenues of $13.60 million.
This is a low-priced stock that could bounce sharply if the company can report a decent quarter and guide higher. I like this name for a post-earnings short-squeeze trade since the stock is starting to show some signs of strength if it can manage to trade above its 50-daym moving average of $1.56 after they report. The stock is also looking strong today with shares up over 10% ahead of the quarter.
The current short interest as a percentage of the float for First Marblehead is 6.6%. That means that out of the 55.37 million shares in the tradable float, 4.27 million are sold short by the bears.
From a technical standpoint, the stock is currently trading below its 50-day and 200-day moving averages, which is bearish. Since March, this stock has slide all the way down to a low of $1.18 a share from a high of $2.54 a share. The stock has recently found some buying support at around $120 a share and is now very close to moving above its 50-day moving average.
The way I would pay this stock is to buy it after they report if it trades above its 50-day moving average of $1.56 a share on strong volume. Look for volume the following day that's tracking in at close to or greater than its three-month average volume of 252,000 shares. I would add to any long position once the stock then trades above $1.70 a share and target a run back towards it 200-day moving average of $1.95 a share or possibly higher if the bulls can spark a big short-squeeze.
One final earnings short-squeeze play is
, set to release numbers on Tuesday after the market close. This is a designer, producer, marketer and retailer of accessories for women. The products include offering of handbags, accessories and travel and leisure items. Wall Street analysts, on average, expect Vera Bradley to report revenues of $96.82 million.
I like this stock for a post-earnings short-squeeze play because the bears have cleaned up on this name recently in a big way. This stock has dropped dramatically from its May high of $52.35 a share to its current low of $24.83 a share. That huge drop could be setting up this stock for a sharp rebound if the bulls hear what they're looking for.
The current short interest as a percentage of the float for Vera Bradley is an extremely large 29.5%. That means that out of the 19.74 million shares in the tradable float, 5.83 million are sold short by the bears. It's worth pointing out that the bears have been increasing their bets from the last reporting period by 10.5%, or by around 554,000 million shares. If the bears are pressing too much ahead of this quarter, then this stock could easily see a big short-squeeze.
From a technical standpoint, the stock is currently trading significantly below both its 50-day and 200-day moving averages, which is bearish. That said, the stock just found some buying support at around $25 a share and has since bounced up towards its current price of around $29 a share.
I would look to be a buyer of this stock after they report if it trades above $30 to $31.56 a share on strong volume. Look for volume the following day that's tracking in close to or greater than its three-month average action of 582,000 shares. I would target a run back towards $35 a share (50-day) or possible $38 a share (200-day) if the bulls gain full control of this stock post-earnings.
I would only short this name if it drops below $25 a share on big volume after the company reports its results. I would add to any bearish bets if it then drops below $22.50 a share and ride this stock down with the short-sellers.
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-- Written by Roberto Pedone in Winderemere, Fla.
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.