WINDERMERE, Fla. (Stockpickr) -- News events have the power to create big volatility in stocks, and one event that can move them substantially higher or lower is an earnings release. Combine a bullish earnings report with a stock that's heavily shorted, and you have the fuel that can ignite a large short squeeze.
Short-sellers hate being caught short a stock that announces bullish earning and forward guidance. When this happens, we often see a tradable short squeeze develop as the bears rush to cover their positions and avoid huge losses. Even the most skilled short-sellers know that it's never a great idea to stay short once earnings spark a big short-covering rally.
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.
Of course, 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 from off a short squeeze. That way, you let 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 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 candidate is
, which is set to report its results on Tuesday after the market close. This independent oil and gas exploration and production firm has principal production, reserves and exploration activities in Poland and oil production and oilfield service activities in the U.S. Wall Street analysts, on average, expect FX Energy to report revenue of $8.35 million on earnings of 3 cent per share.
This stock has been absolutely crushed heading into its earnings report, with shares dropping from a recent high of $10.27 a share to its current price of just over $7 a share. This large move down could provide for a sharp snapback in FX Energy shares if the company reports a decent quarter and provides bullish guidance.
The current short interest as a percentage of the float for FX is a notable 7.4%. That means that out of the 49.49 million shares in the tradable float, 3.67 million are sold short by the bears. It's worth mentioning that those bears have been increasing their bets from the last reporting period by 3.7%, or about 131,500 shares. This low float and reasonably high short interest could spark some a big short-covering rally if the bulls get the news they want to hear.
From a technical standpoint, FX Energy is trading below both its 50-day and 200-day
, which is bearish. That said, the stock has recently found some buying support at around $6.50 a share, which is close to a previous support level from back in May at $6.70 a share. If the stock can hold above these levels heading into its earnings report, then we could see a sharp rally if FX Energy reports a solid quarter.
If you want to play FX Energy for the long side, wait until after it reports and buy the stock if it trades above $7.50 a share on
. Look for volume that's well above the three-month average action of 426,000 shares. I would add to any long position if the stock trades above its 200-day moving average at $7.87 a share. I would look for a run toward the 50-day moving average at $8.71 a share if FX Energy rebounds from here.
I would only short this name if it drops below $6.55 a share on big volume after its report. I would add to any short position if it also trades below $5.70 a share after its report.
Keep in mind that the relative strength index is showing a reading of below 30 right now for FX Energy. This indicates an oversold condition and is a level from which stocks often bounce back. However, like with any stock that shows an RSI reading of below 30, you must see positive price action before jumping in for a snapback rally, since oversold can always get more oversold.
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Another stock with the potential to squeeze the shorts off its earnings report is
, which is set to report results on Tuesday after the market close. This company is engaged in the exploration for and production of gold and silver in Mexico. Wall Street analysts, on average, expect Gold Resource to report earnings of 11 cents per share.
favor the earnings outlook for Gold Resource for the coming quarter. Back on July 5, the company confirmed that its second-quarter results will show record mineral production, revenue and earnings after its first profitable quarter as a mining company during the first-quarter of 2011.
The current short interest as a percentage of the float for Gold Resource is a very large 16.1%. That means that out of the 31.91 million shares in the tradable float, 5.16 million are sold short by the bears. The bears have also been increasing their bets from the last reporting period by 9.6%, or by about 451,000 shares. That large increase could fuel a big short squeeze if they issues bullish guidance.
From a technical standpoint, shares of Gold Resource are trading above the 50-day
but just below the 200-day moving average, which is neutral trendwise. The stock has near-term support at around $24 a share and overhead
at around $28 to $28.50 a share.
The way I would play Gold Resource is to wait until after its report, then buy the stock if it trades above its 200-day moving average of $25.84 a share on
. Look for volume that's close to or well above its three-month average action of 475,000 shares. I would add to any long positions if you see this stock move above $28.50 to $29 a share following their earnings.
I would only short this name after its report if you see the stock trade below $24 a share on big volume. Add to any short positions if it then drops below $22.50 a share and look for a near-term target of $20 if the bears gain control of this name.
One heavily shorted stock in the multimedia and graphics software sector is
, which is set to release numbers on Tuesday after the market close. This company is focused on powering the discovery and enjoyment of digital entertainment by providing a set of integrated solutions that are embedded in its customers' products and services and used by end consumers to simplify and guide their interaction with digital entertainment. Wall Street analysts, on average, expect Rovi to report revenue of $192.52 million on earnings of 58 cents per share.
This company beat Wall Street estimates for the last quarter after missing estimates in the previous quarter. If Rovi hits its estimates for this quarter, that would represent a 42.5% rise in revenue from the year-ago quarter and a 48.5% rise in total revenue from last year's numbers. Like many stocks on your trading screen right now, Rovi is extremely oversold heading into the quarter with the relative strength index showing a reading of below 30.
The current short interest as a percentage of the float for Rovi is a notable 7.3%. That means that out of the 107.88 million shares in the tradable float, 8.18 million are sold short by the bears. The bears have also been increasing their short positions from the last reporting period by 8.4%, or about 630,500 shares. This large increase in new bearish bets could spark a nice short squeeze if Rovi reports a solid quarter and issues bullish guidance.
From a technical standpoint, shares of Rovi are trading below both its 50-day and 200-day moving averages, which is bearish. That said, the stock just started finding some buying interest at around 42.64 a share, which is a price level that's very close to some longer-term support zones at around $41 a share. If you want to play Rovi from the long side, I would wait until it reports to see if the stock if it holds above that recent support price of $42.64 a share. If it holds that level, you could then enter this stock and add to any long position once it trades above $47 a share on big volume. Look for volume on any upside move after they report that's either close to or well above the three-month average action of 1.3 million shares.
I would only short this name if you see Rovi drop below $41 a share after its report on big volume. I break below that level would be very bearish for this stock since its double-bottom
from over a year ago.
Another earnings short-squeeze play in the gold and silver sector is
, which is set to release numbers on Wednesday after the market close. This gold mining company is engaged in gold production and in the acquisition, exploration, development and operation of gold mineral properties in Brazil. Wall Street analysts, on average, expect Jaguar Mining to report revenue of $61 million on earnings of 6 cents per share.
Once again, impressive action in gold bullion prices should make it pretty easy for Jaguar to report a solid quarter, as long as management was able to keep costs in line and production robust. What I really like about this stock heading into the report is that it's trading higher today by over 7% on heavy volume. If we see similar action like this on Wednesday, that should bode well for the stock prior to their report.
The current short interest as a percentage of the float for Jaguar Mining is an extremely large 13.4%. That means that out of the 73.34 million shares in the tradable float, 10.81 million are sold short by the bears. This is more than enough shorts to cause a big short covering really if Jaguar reports a solid quarter and issues bullish guidance.
From a technical standpoint, shares of Jaguar Mining are currently trading below the 50-day and 200-day moving averages, which is bearish. That said, the stock just found some buying
at $4.30 a share, which happens to also be a previous support zone for the stock for the last couple of months.
The way I would play JAG is to buy this stock following its report if it trades above the 50-day moving average of $4.90 a share on heavy volume. Look for volume that's close to or greater than 1.2 million shares. I would add to any long position in this stock if it moves above $5.33 a share to $5.65 a share (200-day) following earnings.
I would short this name only if it drops below $4.30 a share after the report, and I would then add to any short position if it dips to $4.11 a share on big volume.
One final earnings short-squeeze play is
, which is set to release numbers on Tuesday after the market close. This applied technology and advanced materials company develops, manufactures, and markets carbon fibers and technical fibers. Its products include commercial carbon fibers, which are primarily used as a reinforcement material in composites. Wall Street analysts, on average, expect Zoltek to report revenue of $42 million on a loss of 5 cents per share.
This stock has been beaten down dramatically in front of its earnings report, with shares dropping from a recent high in May of $13.14 a share to its current price of just above $8 a share. This huge beat down has created a situation that could spark a big snapback rally if Zoltek delivers a strong quarter and bullish guidance.
The current short interest as a percentage of the float for Zoltek is a very big 17.7%. That means that out of the 27.68 million shares in the tradable float, 4.86 million are sold short by the bears. It's worth noting that the bears have been increasing their bets from the last reporting period by 8.9%, or by about 356,200 shares. This is a very high short interest for a stock with a low float, so any bullish news could easily spark a massive short squeeze for this stock after earnings.
From a technical standpoint, shares of Zoltek are currently trading below both its 50-day and 200-day moving averages, which is bearish. That said, the stock has just started to find some buying support at $7.79 a share, which is very close to previous support levels for this stock for the past two years. Those previous support levels were between $7.10 and $8.27 for Zoltek.
I would be a buyer of this stock following the report once it trades above $8.50 a share on heavy volume. Look for volume that's close to or greater than the three-month average action of 197,000 shares. I would add aggressively to any long position if Zoltek takes out $9.50 a share after its report, and I would look for a target run toward $10.25 a share, which is the 50-day moving average.
I would only short this name if it drops below $7.79 on big volume after the report and then add to any short position below $7.10 a share. I would target $6 to $5 a share if those levels are breached and the shorts gain control of this stock after earnings.
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.