BALTIMORE (Stockpickr) -- With earnings season in full swing on Wall Street, it's the perfect opportunity for market-players to create a 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 a tradable short squeeze develop as the bears rush to cover their positions to avoid big losses. Even the best short-sellers know that it's never a good idea to stay short once a big short-covering rally starts that's sparked by a positive earnings report.
This is exactly why I search 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 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 from off a short squeeze. This way, you letting the trend emerge after the market has digested all of the news.
That said, 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
when they report earnings this week.
My first earnings short-squeeze candidate is
, which is set to report its results on Tuesday after the market close. This is a development stage pharmaceutical company that focuses on acquiring, developing and commercializing products for the treatment of a variety of human diseases. Wall Street analysts, on average, expect Chelsea Therapeutics to report a loss of 24 cents per share.
The company has missed estimates for the past two quarters, but those misses haven't been big ones. For example, last quarter Chelsea missed by 2 cents after reporting a loss of 25 cents versus estimates of a net loss of 23 cents per share. The quarter before that, it also missed by just 2 cents. If the company can break the streak for this quarter and provide some bullish news on their drug pipeline, then the stock could see a solid short squeeze.
The current short interest as a percentage of the float for CHTP is a notable 9.2%. That means that out of the 48.44 million shares in the tradable float, 4.84 million are sold short by the bears. The short-sellers have also been increasing their bets from the last reporting period by 8.1%, or by about 362,900 shares. This large increase in short bets could catch the bears leaning the wrong way if CHTP reports a solid quarter and issues bullish guidance.
From a technical standpoint, shares of CHTP have recently dropped from a high of $6.06 a share to its current price of $5.20 a share. The stock also recently found some buying support just above both its 50-day and 200-day moving averages, which is bullish. The stock has also been up trending strong going into this quarter with shares up from its June lows of around $4.15 a share.
The way I would play CHTP is to wait for the company to report and buy the stock if it trades above $5.65 a share on heavy volume. I would add to any long position once you see CHTP breakout above $6.06 a share. A move above $6.06 could set up this stock for a run back towards its
of $8.20 a share. I would only short this stock if it drops below both its 50-day and 200-day moving averages following their earnings.
I recently included Chelsea Therapeutics on a list of
Another potential earnings short squeeze play is
, which is set to report results on Tuesday after the market close. This company designs, develops, manufactures, sells and supports precision, semiconductor wafer probe card products and solutions. Wall Street analysts, on average, expect FormFactor to report revenue of $45.90 million on a loss of 30 cents per share.
I like this stock for an earnings short-squeeze trade because shares have been beaten down pretty well heading into the report. In late April, FORM was trading at over $11.05 a share, and now the stock is changing hands at around $9.50 a share after hitting a low of $8.50 a share.
The current short interest as a percentage of the float for FORM stands at 7.1%. That means that out of the 50.46 million shares in the tradable float, 3.71 million are sold short by the bears.
From a technical standpoint, shares of FORM have recently broken back above its 50-day and 200-day moving averages on big volume. Volume on Monday when the stock soared through those key
was 829,800, which is well above its three-month average volume of 429,000 shares. The stock has also now started to break out above some past overhead resistance at $9.37 a share.
The way I would play FORM is to buy this stock after it reports if it holds above the breakout level at $9.37 and then moves above its next major resistance level at $9.92 a share on
. I would look for a run back toward $10.50 to $11 a share if the stock trades over $9.92 a share. I would only short this name if it drops back below its 200-day moving average of $9.42 after it reports on big volume.
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Buffalo Wild Wings
An earnings short-squeeze play in the casual restaurant sector is
Buffalo Wild Wings
, which is set to release numbers on Tuesday after the market close. This company engages in the ownership, operation and franchise of restaurants in the U.S. Buffalo Wild Wings provides quick casual and casual dining services, as well as serves bottled beers, wines, and liquor. Wall Street analysts, on average, expect Buffalo Wild Wings to report revenues of $176.72 million on earnings of 60 per share.
This company has topped Wall Street estimates for four quarters in a row going into this quarter. Their profits have jumped year-over-year by an average of $29.5%. Now that the NFL has reached a labor deal that will avoid a lockout for the season, Buffalo Wild Wings could provide some bullish guidance since they won't be losing the avid football fan business.
The current short interest as a percentage of the float for BWLD is a rather large 11.4%. That means that out of the 18 million shares in the tradable float, 2.06 million are sold short by the bears. This is a very large short interest on a stock with a low tradable float. The bears could easily get caught in a squeeze here if BWLD reports a solid quarter since the float is so small.
From a technical standpoint, shares of BWLD recently formed a double top chart pattern at around $69.50 a share. Since hitting that double top, the stock has slid down to just under $67 a share. Despite this slide, the stock is still trading above both its 50-day and 200-day moving averages, which is bullish. The most notable near-term support zone on the stock sits at around $65 a share.
The way I would play this stock is to simply buy some shares after they report only if BWLD trades above $69.50 on heavy volume. A move above that level would mean BWLD is breaking out to new 52-week highs which would likely bring in lots of momentum traders. I would only short this stock if it moves below $65 after the report on big volume. Add to any short position if the stock then takes out its 50-day moving average of $63.21 a share.
Buffalo Wild Wings, one of TheStreet Ratings'
, shows up on a recent list of
An earnings short-squeeze play in the waste management services sector is
, which is set to release numbers on Wednesday before the market opens. This is a provider of solutions for management of medical waste and unused dispensed medications generated outside of the hospital and large health care facility setting, serving more than 4,000 customers in all 50 states. Wall Street analysts, on average, expect Sharps Compliance to report revenue of 4.5 million on a loss of 5 cents per share.
I like this name going into earnings for a beaten-down short squeeze play. This stock has dropped sharply since May, when it was trading at $5.50 a share, to its current level of around $3.60 a share. With the stock down so much in the past few months, a decent quarter from SMED could spark a solid short squeeze.
The current short interest as a percentage of the float for SMED is notable at 7.4%. That means that out of the 10.49 million shares in the tradable float, 757,733 are sold short by the bears. This stock has a very low float and reasonably high short interest. This is the type of situation that can cause a big short squeeze since so few shares are available for trading.
From a technical standpoint, SMED has found some recent buying interest at around $3.15 a share. The stock is currently trading below both its 50-day and 200-day
, which is bearish. Shares of SMED are currently approaching some past
at $3.90 a share. A move above that level could break its short-term downtrend pattern.
The way I would play SMED is to buy the stock after the report if you see this name trade above $3.90 a share on strong volume. Since that level use to be support and now is resistance, a move through should be considered bullish. I would add to any long position if you see SMED trade above its 50-day moving average of $3.97 following earnings. I would only short this stock if it drops below $3.15 a share on big volume.
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One more earnings short-squeeze play is
, which is set to release numbers on Wednesday after the market close. This company and its consolidated subsidiaries are a designer, manufacturer, distributor, worldwide marketer and brand manager of footwear and accessories for men, women and children. Wall Street analysts, on average, expect Crocs to report revenues of $281.64 million on earnings of 43 cents per share.
Shares of Crocs are trading very strong going into their earnings report with the stock up over 63% so far this year. Much of those gains can be attributed to the successful turnaround of the company and execution by their management team. Crocs has topped Wall Street estimates for the past four quarters and last quarter it beat handily by 5 cents. If management continued to perform for this quarter, then we have a great chance for another big beat here.
The current short interest as a percentage of the float for CROX is a very high 13.1%. That means that out of the 83.91 million shares in the tradable float, 10.98 million are sold short by the bears. This high short interest could spark a big short covering rally if CROX reports solid numbers and guides higher.
From a technical standpoint, shares of CROX have run up over 7 points from June going into this quarter. The stock is currently trading above both its 50-day and 200-day moving averages, which is bullish. Also, the upside volume has been tracking in bullish for the past month and a half, with most up days producing stronger volume than down days.
The way I would play CROX is to be a buyer of a major breakout after the company reports earnings. I would buy this stock if you see it take out its 52-week high of $29 a share. That area is also a previous overhead resistance zone, so a move above $29 could spark some big short covering. I would only short this name if it drops below some near-term support at $26 a share following their earnings report.
Crocx shows up on a June list of
To see more potential earnings short squeeze candidates, 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.