BALTIMORE (Stockpickr) -- One way to make big short-term profits quickly is to trade a stock that experiences a large earnings-related short squeeze.
Short-sellers hate being caught short a stock that produces earnings that please Wall Street. When this happens, we often see tradable short squeezes develop as the bear rush to cover their positions and avoid even bigger losses. Even the best short-sellers know that it's never a good idea to stay short once a big short-covering rally materializes.
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. Don't go betting the farm on these plays, and manage your risk accordingly. In downtrending markets like we're in right now, it might make more sense to wait until after companies report to try to take advantage of a short squeeze. This doesn't mean you can't trade ahead of the quarter -- it just means that bull market traders aren't in control of overall market.
Only trade the names you have the highest conviction on ahead of the quarter in markets like we have right now. Remember, bull markets like we saw
offer up much easier short-squeeze earnings trade opportunities. The bottom line: Know your market and change with it accordingly.
Here's a look at a number of
when they report earnings this week.
My first earnings short-squeeze candidate today is solar wafer producer
, which is scheduled to release its results on Tuesday after the market close. Wall Street analysts, on average, expect LDK to report revenue of $769.45 million on earnings of 86 cents per share.
This stock has been beaten down big going into the quarter from its yearly high of $14.97 to its current price of around $6.60 a share. Short-sellers have been circling around
because some think that China-based firms have suspect numbers. If this doesn't hold to be true for LDK, then the stock could be setting up for a sharp rebound.
The current short interest as a percentage of the float for LDK is a whopping 40%. That means that out of the 57.7 million shares in the tradable float, 23.6 million are sold short by the bears. The short-sellers have also been increasing their bets from the last reporting period by 3.4%, or about 779,000 shares. The shorts have been right for the past couple of months, but if the company does report good numbers, we could easily see a big short squeeze here.
From a technical standpoint, shares of LDK are trading below both their 50-day and 200-day
. That said, the stock is extended by over 3 points below both of those averages. The relative strength index has a current reading of 30, which indicates a potentially oversold condition. The stock has recently found some buying support at around $6.14 a share that was accompanied by
One could buy LDK ahead of the quarter and simply get out of the trade if it violates $6.14 on the downside. You could also wait until it reports and jump in as soon as you see a short squeeze develop. I would add to any long position after the report once the stock takes out some overhead resistance at around $7.75 a share. This is an oversold stock, but that doesn't mean it can't get more oversold. With that in mind, I am not a big fan of shorting oversold stocks at any time, not just into earnings.
My next earnings short-squeeze play is yoga-inspired athletic apparel designer and retailer
, which is set to report its results on Friday before the market opens. Wall Street analysts, on average, expect this company to report revenue of $180.91 million on earnings of 38 cents per share.
Lululemon is a fast-growing retailer that has been blowing the cover off the ball during a number of recent earnings reports. The company is projected to show earnings growth of 40% for this quarter and 33% for their next quarter. The stock trades at a forward price-to-earnings of 33, so Lululemon is going to need a big "beat and raise" to see its stock rip higher on Friday.
The current short interest as a percentage of the float for Lululemon stands at 10.8%. That means that out of the 48.5 million shares in the tradable float, 5.23 million are sold short by the bears -- a reasonable short interest on a low-float stock. If Lululemon can produce bullish results, then the stock could easily squeeze the shorts.
From a technical standpoint, this stock has dropped from its recent high of $102.83 to its current price of around $84 a share. The stock has also dropped below its 50-day moving average of $93.65 a share. There has been some increased selling volume on the stock going into the quarter with a number of days registering volume of 3.7 million, 3.4 million and 4.3 million shares vs. the three-month average daily volume of 2 million shares. That said, this stock is oversold, with a current RSI reading of 29, which could set it up for a rebound if Lululemon delivers a solid report.
One way to trade this stock ahead of the quarter is to buy some out-of-the-money calls so your risk is defined. Watch closely how Luluemon trades into Friday to see if the selling volume dries up and if any large buying volume moves in. I wouldn't buy the shares ahead of the quarter here. I would only buy if you see a short squeeze start after the report. I would stick with the options here if you want to play it ahead of the quarter.
A big bullish bet on Lululemon in the first quarter comes from
, which counts the stock as its largets holding with a 5.6 million-share stake. Lululemon is also featured today in "
Another short-squeeze candidate is
, which is due to report results on Tuesday after the market close. This company designs, develops and markets products, systems and services for communications solutions. Wall Street analysts, on average, expect Comtech to report revenue of $144.81 million on earnings of 39 cents per share.
This company beat analysts' estimates last quarter when it reported earnings of 52 cents per share vs. the estimates for 42 cents. The stock didn't make a large move off that report, but it did bottom in the subsequent days and then preceded to rally from $25 to $29.67 a share.
The current short interest as a percentage of the float for Comtech is a notable 8.8%. That means that out of the 26.09 million shares in the tradable float, 2.31 million are sold short by the bears. The short-sellers have also raised their bets dramatically from the last reporting period by 9.7%, or about 203,000 shares.
From a technical standpoint, Comtech is currently trading below its 50-day moving average and right around its 200-day
of $27.36 a share. The stock looks like it's starting to find some buying support at around $27 a share. If Comtech can manage to stay above $27 going into the quarter, then it could be worth a long play for a potential short squeeze.
Watch for this stock to trade above the 200-day moving average on Tuesday on volume that's well above the three-month average
of 234,000 shares. I would add to any long positions if Comtech takes out $28 and then $28.50 a share with volume following the report. I would either avoid this stock, or get out of any long trade if it moves below Monday's lows of $26.96. I don't want to play the options here; I would either position before or after the report by playing the stock.
Another heavily shorted stock that could be ripe for a short squeeze is global licensor of 3-D technologies
, which is set to release its numbers on Thursday after the market close. Wall Street analysts, on average, expect RealD to report revenue of $51.93 million on a net loss of 15 cents per share.
This company failed to beat earnings estimates last quarter, but JPMorgan recently said the stock is a buy on weakness, noting that 3-D ticket sales in international markets remain robust. This stock has been absolutely hammered heading into the quarter, with shares down from a recent high of $35.60 to its current price of around $24 a share. This could be creating an oversold condition, so if RealD reports a decent quarter, we could see a relief rally.
The current short interest as a percentage of the float for RealD is a rather large 24.4%. That means that out of the 37.65 million shares in the tradable float, 8.7 million are sold short by the bears. The shorts have also been increasing their bets from the last reporting period by around 2.8%, or by about 237,000 shares.
From a technical standpoint, this stock has recently sliced through both its 50-day and 200-day
as it dropped over 10 points in just a few weeks. That said, RealD has some longer-term
at around $23 to $21 a share, and it's extremely oversold with a RSI reading of 29. It could trade lower on a bad report, but I don't like to short stocks this oversold. The risk/reward just isn't compelling.
One way to play this stock would be to buy it ahead of the report as long as it doesn't trade below $21. You could also wait until after the report to see if a short squeeze materializes and then jump into the trade. If you want to speculate with limited risk, then buy some June 25 calls ahead of the report.
One more earnings short-squeeze trade to keep on your radar is
, which is set to release numbers on Wednesday before the market opens. Ciena is a provider of communications networking equipment, software and services that support the transport, switching, aggregation and management of voice, video and data traffic. Wall Street analysts, on average, expect Ciena to report revenue of $428.10 million on earnings on a loss of 10 cents per share.
Last quarter, Ciena beat analysts' estimates after they reported a loss of 14 cents vs. Wall Street estimates for a loss of 17 cents. If the company beats estimates again this quarter, that would be its third consecutive beat. Despite the positive results, the stock traded off by around 6% after its last earnings report. The key to Ciena for this quarter will be its forecast and whether or not it sees profitability in the fiscal third quarter. MKM Partners recently said that its research suggests that demand-generation activities at a number of Ciena's customers have been strong.
The current short interest as a percentage of the float for Ciena is a rather large 24.7%. That means that out of the 92.55 million shares in the tradable float, 23.24 million are sold short by the bears.
From a technical standpoint, Ciena recently sliced below its 50-day
on big volume of 6.8 million shares, vs. its three-month average volume of 5.7 million shares. That's never a good sign to see a stock break below its 50-day on
. That said, the stock is moving towards some support at $23 a share. If it can hold above $23 going into the report, then there might be a long trade here for a potential short squeeze.
One way to play this is to simply wait until after they report and then buy the stock if it trades above $25 a share on heavy volume. I would add to any long positions if it moves above the 50-day moving average of $26.28 a share. One could also speculate into the quarter with some out-of-the-money June call options that would define your risk. I wouldn't go too far out of the money with the calls, and I would only buy them if Ciena holds $23 and isn't selling off hard with volume prior to the report.
To see more potential earnings short squeeze candidates such as
, 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.