WINDERMERE, Fla. (Stockpickr) -- Earnings season is in full swing, and this week will feature some of the biggest and most profitable companies in the world, including Amazon.com (AMZN) - Get Amazon.com, Inc. Report, eBay (EBAY) - Get eBay Inc. Report, Microsoft (MSFT) - Get Microsoft Corporation (MSFT) Report and Starbucks (SBUX) - Get Starbucks Corporation Report. Whether or not these companies forecast more profits ahead could be the key to where the market trends, so it's very important to watch how things unfold.
A number of other popular and well-known stocks are setting up to make huge moves once they report earnings. These stocks could experience massive volatility and directional price trends because they are heavily shorted going into their reports. If these companies deliver strong results, they could see big short-squeezes that push their stocks significantly higher.
I love to search the market for heavily shorted stocks that are about to report earnings. You only need to find a few of these a year to 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. First, you should only be betting with risk capital, and you should get creative and consider using options to manage risk. Second, cut your losses fast if the trade goes against you. Third, don't be afraid to take the other side of the trade if things don't set up right.
For example, if you play the options prior to the report and the stock starts to trend away from you, then trade with the trend in the stock to hedge and manage your risk. Trading earnings doesn't have to be like walking into a casino and just gambling. Be smart and willing to change on a dime, and remember that the goal is to capture as much volatility as you can in a very short timeframe.
Here's a look at a number of
when they report earnings this week -- and one that could make a profitable short.
My first earnings short-squeeze play is
( APKT), which is scheduled to release its results on Tuesday after the market close. This company provides session border controllers that enable service providers, enterprises and contact centers to deliver interactive communications and data services across Internet protocol network borders in the U.S., Canada and internationally. This stock has been on a tear so far in 2011, with shares up over 45%. Wall Street analysts, on average, expect the company to report revenues of $71.32 million on earnings per share of 25 cents.
I like this play going into earnings because other similar names in the cloud computing and networking sectors, such as
, have recently surged higher after they reported solid results. I also really like that the stock never took a hit like the rest of the group and is now trading very close to its
of $80.74 a share.
The current short interest as a percentage of the float for APKT sits at around 7.1%. That means that out of the 52.71 million shares that are in the tradable float, 3.81 million are sold short by the bears as of March 31. It's worth noting that the shorts in this stock have been increasing their bets from the last reporting period by 9.7%, or about 337,000 shares. This sets up the stock for a solid short squeeze if the company can deliver bullish numbers and guidance.
From a technical standpoint, the stock has seen some strong volume up days in the last couple of trading sessions as it has started to break out above some past overhead resistance at around $77.25 to $77.65 a share. The trend is clearly up in this stock, so one way to play this is to buy it ahead of the report as long as it doesn't trade back below those breakout levels I mentioned. You could also wait until after the report and only buy once it has taken out its 52-week high.
If we get good results out of APKT and the stock doesn't sell off bad on big volume, then I think this stock will print $100 a share very soon. It's worth noting that if APKT takes out its 52-week high, it will also mark an all-time high for the stock. That means APKT will have no resistance if it wants to continue its uptrend higher from here.
For more on Acme Packet, which is one of TheStreet Ratings'
, I recently featured it in my list of
My next earnings short-squeeze play is
, which is set to report its results on Thursday after the market close. This company engages in the design, development and marketing of semiconductor processors for intelligent and secure networks. This stock is up over 20% so far in 2011. Wall Street analysts, on average, expect Cavium to report revenue of $62.80 million on earnings of 28 cents per share.
Like with Acme Packet, with Cavium I want to play the momentum off of recent earnings strength from other names in the semiconductor space, such as
. Cavium is a networking semi player that produces chips which target end markets like enterprise networks, data centers, storage and broadband to name a few. These are all hot markets, and that's demonstrated by the company's projected 42% growth rate for this year.
The current short interest as a percentage of the float for CAVM is a rather large 15.5%. That means that out of the 45.49 million shares in the tradable float, 7.01 million are currently sold short by the bears as of March 31. This is a very high short interest for a stock with a low float. This is exactly the type of situation that can produce a big short squeeze if the company delivers strong results and bullish guidance.
From a technical standpoint, CAVM recently broke out above $46.50 a share, but it's now running into some resistance at around $47.20. I would buy this stock ahead of earnings if it can manage to break out above $47.66, which is the 52-week high on the stock. It would be constructive to see strong volume that's well above the three-month average activity of 1 million shares if the stock breaks out. One strategy you could use here is to speculate in some May call options near-the-money ahead of the report and then short the stock if it starts downtrending after the report to hedge.
You could also just simply wait until CAVM reports and only buy if it starts breaking out above $47.66 and maintains an uptrend. Keep in mind that strong price action in a stock after earnings can continue for weeks or even months. For example, this is exactly what I think
is going to do now that the company reported a monster quarter and spiked higher. As the saying goes, "the trend is always your friend."
For more on Cavium, I featured it recently in my list of
Another earnings short squeeze candidate is
, which is due to report results on Tuesday after the market close. This company is a fabless semiconductor player that designs, develops and markets systems solutions to enable connected home entertainment. This stock has been crushed by the bears so far in 2011 with shares off by around 30%. Wall Street analysts, on average, expect this company to report revenues of $71.34 million on earnings of 21 cents a share.
My thesis here is simple: Buy Entropic ahead of the quarter since the stock is so heavily shorted and so beaten-down from its January high near $14 to its current price at around $8.50 a share. Could this stock trade lower? Sure, but this is a high-growth company that has a good chance of beating analysts' estimates, so the risk/reward here looks better on the upside. Entropic is projected to grow during the current quarter at 250% and next quarter at 150%. The stock is currently trading at a trailing price-to-earnings of 10 and a forward price-to-earnings of 9.3. If they beat and guide higher this stock could get revalued upwards in flash since it's so cheap.
The current short interest as a percentage of the float for ENTR is a whopping 35.9% as of March 31. That means that out of the 83.27 million shares in the tradable float, 29.99 million are currently sold short by the bears. Plain and simple, this stock is going to soar with that high of a short interest if the company can beat and guide higher.
One way to play this is to speculate with some May 9 or 10 calls ahead of the report so your risk is defined and you know exactly how much capital you could lose. You could also wait until after the report and jump in from the long side if the stock starts to uptrend with volume. Remember, this stock is beaten-down big, so it could trend higher for some time if they deliver what the bulls are looking for.
Entropic, which shows up in
, was also one of my
If you're searching for an earnings short-squeeze candidate that's leveraged to social media and cloud computing, then take a hard look at
, due to report earnings on Wednesday after the market close. Open Text develops, markets, sells, licenses and supports enterprise content management solutions primarily in North America and Europe. This stock is off to a hot start in 2011, with shares up over 40%. Wall Street analysts, on average, expect Open Text to report revenues of $248.31 million on earnings of 97 cents a share.
For a fast-growing tech stock, Open Text is far from expensive with shares currently trading at a trailing price-to-earnings ratio of 30 and a forward price-to-earnings of 13. The company is projected to grow during the current quarter at 38%, and for the entire year growth is pegged at 36.5%. If this company is even reasonably managed they should be able to knock the cover off the ball since social media and cloud computing are such red-hot growth markets.
The current short interest as a percentage of the float for OTEX sits at around 9% as of March 31. That means that out of the 55.74 million shares in the tradable float, 5.02 million are currently sold short by the bears. It's also worth noting that the bears have increased their bets from the last reporting period by around 6.8%, or by 318,000 shares. That sets this stock up nicely for a potential squeeze if the company can deliver bullish numbers and guidance.
From a technical standpoint, the stock recently broke out above $66.71 a share, but it has now traded back below that breakout level. One strategy you could use here is to buy the stock ahead of the report if it trades above $66.71 and then $67.08 a share on strong volume. Or, you could wait until they report and then buy if it breaks out above those levels. I like that this stock has been making higher lows for the past couple of months, so unless the uptrend line at around $61 to $60 a share is broken, then it should continue to move higher.
Open Text is one of TheStreet Ratings'
It's not a short-squeeze play, but another name that could trade significantly higher on earnings is
, which is set to report on Wednesday after the market close. Baidu.com provides Chinese and Japanese language Internet search services. This stock continues to be a market leader in 2011, with shares up over 50%. Wall Street analysts, on average, expect Baidu.com to report revenue of $367.38 million on earnings per share of 45 cents.
I want to play Baidu.com long going into its report because Chinese Internet provider of news, information, entertainment and communication
soared on Monday following strong first-quarter results. Shares of Sohu jumped 8.8%, and
, a Chinese gaming firm, also beat and saw its stock rise 9%. Sohu said brand ad sales jumped 45%, so I am looking for a strong ad sales number out of Baidu.com when they report.
One way you could play Baidu.com is to speculate with some May call options that are near-the-money -- let's say the 155 or 160 strike. If the stock gaps up and wants to trend higher, you should be sitting pretty since those options won't expire until May 20. Remember, this is just a trade, so flip it if the stock gaps down the next day. You could hedge this trade by buying the weekly 140 puts on a ratio basis, or trade the trend after hours and short the stock if it moves lower.
Baidu was featured yesterday as one of
, and it shows up on a list of
Shifting gears, one stock that could make for a good short trade in front of earnings is
, which is set to report on Wednesday after the market close. This company designs and develops advanced digital wireless technologies for use in digital cellular and wireless IEEE 802-related products and networks. This stock is only up by around 8% so far in 2011, so it's already showing signs of weakness. Wall Street analysts, on average, expect InterDigital to report revenues of $76.46 million on earnings per share of 57 cents.
This short idea is strictly based off of the technicals. I would short this stock or buy May puts ahead of the report, as long as the stock doesn't trade above the 50-day moving average of 47.14 a share. If you look at the chart for IDCC, you'll see that the stock has been making lower lows for the past couple of months, and it's forming a bearish descending trend line from its February highs at $58.52 a share. I would also like to point out that upside volume has fallen off a cliff for the past couple of weeks, which is often an ominous sign of lower prices for a stock.
The stock has also been making higher lows since mid-March, so it would be really bearish if the stock breaks support at $44.44, either before or after its report. I have a feeling we are going to see that support break before they report, so be ready to short this if we get it. I wouldn't be a buyer of IDCC unless it trades above $49.57 a share on strong volume, and that most likely won't happen until after the report. The lack of upside volume is what really perks my short interest here, so unless that changes in the next few days, I think we could see a sizable move down on earnings in IDCC.
To see more potential earnings short-squeeze candidates, including
Melco Crown Entertainment
( RNOW), check out the
portfolio on Stockpickr.
-- Written by Roberto Pedone in Winderemere, Fla.
Follow Stockpickr on
and become a fan on
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.