WINDERMERE, Fla. (Stockpickr) -- Taking a position in a stock ahead of its earnings report is a risky venture. The reason stocks swing so wildly after a company reports its earnings is that volatility often rises once the fundamental news is reported. Going long a heavily shorted stock ahead of a company's earnings can produce spectacular gains if the bulls are rewarded with positive results.
These stocks can trade significantly higher if the bears are caught on the wrong side of the trade. Short-sellers bet against stocks for a lot of reasons, including poor fundamentals, overvaluation and poor technical chart patterns. But even the best short-seller can make the mistake of being short the wrong stock prior to a company's earnings report.
On the flipside, if a stock is heavily shorted prior to an earnings report and the company fails to deliver strong results, then the bears will have an open season to knock the stock down substantially. A short squeeze can be the start of a major trend that takes a stock higher for days and even weeks -- providing the opportunity for market players to make some big money.
But before you trade any earnings short squeeze candidate, make sure you're only using risk capital and you're prepared to cut your losses quick in case the trade doesn't pan out. You'll also need to be prepared to trade outside of regular trading hours because that happens to be when most earnings reports are released.
Before we take a look at some potential earnings short squeeze candidates, let's go over the basics. A short squeeze is a rapid increase in the price of a stock that occurs when there is a lack of supply and an excess of demand for the stock. Short squeezes happen when bears who've sold the stock short are forced to cover their position on a stock as it rises. Short sellers will cover their positions to avoid losses further losses.
Here's a look at a
when they report earnings this week.
Research In Motion
My first idea for an earnings short squeeze play is
Research In Motion
( RIMM), which is scheduled to report its results on Thursday after the market close. This company is a designer, manufacturer and marketer of wireless solutions for the worldwide mobile communications market. This stock is off to a decent start in 2011 with shares up around 7.8%. Wall Street analysts, on average, expect RIM to report revenue of $5.63 billion on earnings of $1.75 per share.
We all know that Wall Street is concerned about the threat to RIM's BlackBerry smartphone device from
popular iPhone product. However, most of those concerns are already priced into the stock, considering that shares currently trade at forward price-to-earnings of just 9. I have never really understood those concerns since Apple sells way more into the consumer market while RIM sells into the corporate and government markets. A Credit Suisse analyst recently said that RIM is enjoying smartphone share gains in almost all international markets driven by the Torch, Bold 2 and Curve 3G. International sales growth could be the driver for the current quarter if Credit Suisse is right.
RIM also recently said that it plans to release its table computer, the PlayBook, in mid-April. The PlayBook already has one major advantage in that it's going to run off of
Android operating system. Maybe the threat analysts should start worrying about is what the PlayBook could do to Apple's iPad sales. RIM has already announced that it's going to match Apple's iPad 2 price with a base price for the PlayBook of $499. Let's also not forget that the PlayBook is going to be able to display web pages that use Adobe Flash software, which is something the iPad doesn't do.
The current short interest as a percentage of the float for RIMM is 4.5%. That means that out of the 463.82 million shares that are in the tradable float, 20.86 million shares are currently sold short by the bears as of Feb. 28. This isn't a huge short interest, but it's more than enough to spike the stock significantly higher if a short covering rally does take hold.
From a technical standpoint, RIM is currently trading below its 50-day moving average of $63.92. I would only buy this stock for an earnings short squeeze trade if it can get above that 50-day on big volume that's well above the three-month average trading activity of 9.8 million shares prior to the report. I would also like to point out that the stock has made five lower highs in the past six months which is bullish.
Research In Motion, which is also on
, shows up in various Stockpickr professional portfolios, including that of
, which initiated a new position in the stock in the most recently reported quarter.
My next earnings short squeeze candidate is
, which is set to report its results on Thursday after the market close. This company, together with its subsidiaries, operates as a mall-based specialty retailer in the U.S. It engages in the retail of athletic casual footwear, apparel, and accessories for men, women and kids under the Finish Line brand name. Wall Street analysts, on average, expect Finish Line to report revenue of $376.06 million on earnings per shares of 65 cents.
Finish Line has been a serial earnings outperformer, beating Wall Street's per-share earnings estimates in three of the past four quarters. Several competitors, including
Dick's Sporting Goods
, have recently reported positive results, which points to sales momentum in the footwear space. However,
recent results casted some doubts on the space when the company warned of cost pressures that will continue to hurt margins going forward.
A Wedbush analyst put some of those doubts to rest when they released a note on Monday that said they see strength in the athletic cycle, particularly in running, which bodes well for FINL. Wedbush reiterated their outperform rating and their $23 price target on the stock. Plus, they raised their EPS estimates to 66 cents per share from 63 cents.
The current short interest as a percentage of the float for FINL sits at around 10.6%. That means that out of the 50.66 million shares in the tradable float around 5.48 million shares are currently sold short by the bears as of Feb. 28. That's a reasonable short interest for a stock with low number of shares in its tradable float. This stock could definitely squeeze quick if it reports solid numbers and bullish guidance.
From a technical standpoint, I like that FINL is trading above both its 50- and 200-day moving averages as its earnings report approaches. I would also like to point out that some huge upside volume recently came into the stock on Friday at 2.4 million shares vs. the three-month average trading volume of around 860,000 shares. That could mean some large traders are positioning for a bullish earnings report. I would buy this stock right now, and add to the position on any high-volume moves above $18 to $18.25 a share prior to the report. I would get out of this trade if the stock drops below the 50-day moving average of $16.84 a share.
Finish Line shows up on a recent list of
and was highlighted as one of
My final earnings short squeeze candidate is
, which is due to report results on Monday before the market open. This company engages in the production, grading, packaging, marketing, and distribution of shell eggs primarily in the southeastern, southwestern, mid-western, and mid-Atlantic regions of the U.S. This stock has struggled so far in 2011 with shares off by around 10.5%. Wall Street analysts, on average, expect Cal-Maine Foods to report revenues of $284.80 million on earnings of $1.22 per share.
My thesis here for Cal-Maine is that volume over price should be the winning formula for the current quarter. Egg prices are actually lower year-over-year by around 40 cents, but that should actually be a good thing for Cal-Maine. Customer should be flocking to eggs right now since the price of so many other competing food products we buy at the grocery store are skyrocketing. The one problem could be if the company didn't hedge its feed costs and keep them inline to offset any lost pricing power from the drop in egg prices.
The drop in egg prices and the rising feed costs due to soaring commodity prices could already be priced into the stock. Shares are down notably since December 2010 from $34 to its current price of around $28. Management could also provide some bullish guidance due to the upcoming Easter holiday since the firm is the largest egg producer in the U.S.
The current short interest as a percentage of the float for CALM is a very large 28% as of Feb. 28. That means that out of the 14 million shares in the tradable float, 3.77 million are currently sold short by the bears. This is a huge short interest for a stock with a very low tradable float. This is exactly the type of situation that can produce a massive short squeeze if the company reports solid results.
From a technical standpoint, CALM has just started to trade above its 50-day moving average of $28.26 a share. I would buy this stock right now, and add to the position ahead of the quarter if you see a high-volume move above some near-term overhead resistance at around $29 to $29.39 a share. That's a significantly resistance level where the stock has failed at twice in the past couple of months. I would get out of the trade if the stock falls below some near-term support at $27.20 a share. This stock could squeeze pretty big if it takes out the 200-day moving average of $29.85 following their report as well.
Cal-Maine is one of
To see more potential earnings short squeeze candidates, including
SMART Modular Technologies
, 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.