BALTIMORE (Stockpickr) -- One way to make a ton of profits in a very short time frame is to take advantage of a stock that experiences a large earnings-related short squeeze.
Short-sellers fear being caught short when a company produces earnings that Wall Street loves. When this happens, we often see gigantic short squeezes develop as the bears quickly throw in the towel to cover their positions and avoid losing lots of money. 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. First, don't ever bet any amounts of money that will cause you to lose sleep at night. Keep your bets reasonable and only use risk capital, or capital you have designated for speculating with.
Also, cut your losses fast when you're wrong, and don't be afraid to take the other side of the trade if things don't set up right. 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.
My first earnings short-squeeze play is
, a global publisher, developer and distributor of interactive entertainment software, hardware and accessories. Take-Two is scheduled to release its results on Tuesday after the market close, and Wall Street analysts, on average, expect it to report revenue of $145.72 million on a loss of 41 cents per share.
I am expecting big numbers for Take-Two's
video game, which recently received glowing reviews. In fact, one reviewer, Total Video Games, called it "A defining moment in video games of this generation." Numbers should also be bullish for its
franchise, which has sold over 5 million units since its release, making it the best-selling game in the history of 2K Sports.
The current short interest as a percentage of the float for TTWO sits at 12.1%. That means that out of the 72.32 million shares that are in the tradable float, 10.07 million are currently sold short by the bears as of April 29.
From a technical standpoint, shares of TTWO recently hit a
at $17.58 and broke out above some past overhead resistance at around $16.60 to $16.75 a share. The stock has since then pulled back below the breakout level to its current price of around $16.50. Despite that pullback, the stock is still trending above its 50-day
of $15.69 a share.
One way you could play this heading into the report is to buy near-the-money or out-of-the-money call options if you see the stock get back above those key breakout levels I mentioned on strong volume. Consider any volume above the three-month average activity of 1.5 million shares as bullish. You could also just wait until Take-Two reports and buy only once the stock takes out $17.58 on heavy volume.
I highlighted Take-Two earlier this month in "
," and Jamie Dlugosch has also flagged it as an earnings-related play, in "
My next earnings short-squeeze trade idea is
, which is set to report its results on Tuesday after the market close. This company, together with its subsidiaries, provides television technology and services that include digital video recorders in the U.S. and internationally. Wall Street analysts, on average, expect TiVo to report revenue of $41.98 million on a loss of 31 cents per share.
One of the reasons I like TiVo heading into its report is due to some bullish options activity in the stock. Schaeffer's Investment Research reported that during the past five days, traders on the International Securities Exchange have bought 217.28 times more call options than put options. This could be just hedging activity, but when you consider all of the takeover chatter and the new Hulu Plus launch, I want to lean more on the bullish side here.
The current short interest as a percentage of the float for TiVo is a rather large 14.9% as of April 29. That means that out of the 114.61 million shares in the tradable float, 17.61 million are sold short by the bears. These short-sellers have increased their bets notably from the last reporting period by around 6.2%%, or by about 1 million shares.
One way to play this going into the quarter is to buy near-the-money or out-of-the money call options for a speculative play. You could also wait until after they report and buy the stock if it takes out some near-term overhead resistance at around $9.90 a share, and then add again above $10.60 on big volume. Look for volume that's well above the three-month average activity of 4.8 million shares.
Karvy Global also has its eye on TiVo ahead of earnings, on its
Another earnings short-squeeze candidate is laboratory testing services provider
, which is due to report results on Wednesday before the market opens. Wall Street analysts, on average, expect Bio-Reference to report revenue of $131.16 million on earnings of 24 cents per share.
Bio-Reference is the fourth-largest full service laboratory in the U.S. and the largest independent region laboratory in the Northeastern market. The company is estimated to grow at 19% this year and over 18% next year. The stock trades at a forward price-to-earnings of 18%, so any upside surprises in growth should be bullish for this stock.
The current short interest as a percentage of the float for BRLI is an extremely large 27.3% as of April 29. That means that out of the 24.65 million shares in the tradable float, 6.73 million are sold short by the bears. The bears have been adding to their positions during the most recent reporting period by around 3.5%, or by about 228,000 shares. This is a stock with an extremely low float and a very high short interest, a situation that can lead to a big short squeeze if the company delivers what the bulls are looking for.
From a technical standpoint, this stock just failed at a big resistance area around $25.50 a share, which is also the stock's all-time high. Bio-Reference tested that area numerous times during the last month but failed to trade above it. This isn't the end of the world since the trend on BRLI has been up for quite awhile. That said, on Monday the stock sold off right down to its 50-day
of $23.49 on huge volume.
Much of that selling was caused by a negative piece out of
over the weekend that said the stock is overvalued and that its earnings quality is suspect. That article probably persuaded more short-sellers to jump into the trade ahead of the quarter. If they are caught leaning the wrong way, this heavily shorted stock will punish them. Keep in mind that
could be right, but the timing could be wrong for its thesis on valuation.
One way to play this is to simply wait until BRLI reports and buy this stock only after it takes out that massive resistance at around $25.50 a share on big volume. I would look for a move above $25.50 on volume that's well above the three-month average activity of 175,000 shares for a buy confirmation. If you see BRLI below its 50-day ahead of the report, combined with
selling, then avoid it.
Another tech stock that's heavily shorted going into its earnings report is
, which is set to release numbers on Thursday before the market opens. This company engages in the development and marketing of health care information systems that automate certain aspects of medical and dental practices. Wall Street analysts, on average, expect Quality Systems to report revenue of $94.74 million on earnings of 61 cents per share.
This is a high-growth company that's projected to grow 24% this year and 32% next year. The stock trades at a forward price-to-earnings of 31.91, so there's little room for any growth hiccups when it reports. That said, the stock is trading near all-time highs heading into the quarter, which demonstrates strong demand for the shares.
The current short interest as a percentage of the float for QSII stands at 22.5% as of April 29. That means that out of the 19.25 million shares in the tradable float, 4.32 million are sold short by the bears. This is another very low-float, high-short-interest situation that could produce a ton of short covering if the bulls like what they hear.
From a technical standpoint, this stock recently ran into some overhead resistance at around $91.22 to $91.50 a share. That $91.50 level happens to be the all-time high on the stock. Shares are now trending above the 50-day moving average of $85.51, and the stock has been forming a pattern of higher lows since the start of the year.
The way I would play this stock heading into the quarter is to see if some near-term support at around $87.50 holds up and buy the stock if it does. Make sure you see big upside volume move in around $87.50 that's well above the three-month average activity of 171,000 shares. You could also wait until after they report and see if QSII wants to uptrend and short-squeeze. Buy it following earnings once it takes out $91.57 on big volume.
Avoid this stock altogether if it moves below the 50-day ahead of the quarter or if it breaks that pattern of higher lows.
Quality Systems, one of TheStreet Ratings'
, shows up on a list of the
One more earnings short-squeeze candidate to put on your watchlist is
, which is set to release numbers on Thursday after the market close. Wall Street analysts, on average, expect OmniVision, which designs, develops and markets semiconductor image-sensor devices, to report revenue of $254.48 million on earnings of 65 cents per share.
This company should be benefiting big from the huge growth of smartphones that use its advanced camera technology. A semiconductor analyst from
Lazard Capital Markets
recently wrote that OmniVision has a significant opportunity to provide camera sensors for
next iPhone, which could lead to $400 million in revenue in the next 12 months.
Smartphone growth as demonstrated by Apple's last quarter continues to be strong, and OVTI is considered to be a market leader for digital camera chips. These dynamics should bode well for the coming quarter, considering that more than 75% of OVTI's revenue comes from the smartphone segment.
The current short interest as a percentage of the float for OVTI is 10.1% as of April 29. That means that out of the 57.22 million shares in the tradable float, 5.78 million are sold short by the bears. This is a reasonably short interest for a stock with pretty low tradable float. We could easily see big short covering if OVTI beats and raises guidance.
From a technical standpoint, OmniVision is currently trending above its 50-day
of $32.95 a share. The stock is also changing hands only a few points off of its all-time high of $37.04 a share. Shares of OVTI have been forming a pattern of higher lows for the past month and a half, so if that trend remains in place we have a good shot of seeing higher prices.
One way to play this it to buy some near-the-money or out-of-the-money call options ahead of the quarter as long as the stock holds the 50-day and holds that pattern of higher lows. You could also wait until after its report and buy only after it takes out some near-term resistance at $36, and then buy hand over fist if it trades through $37.04 on big volume. Look for volume that's well above OVTI's three-month average activity of 2.6 million shares.
Jim Cramer predicts good things in OmniVision's report; the stock is one of his
To see more potential earnings short squeeze candidates such as
Pacific Sunwear of California
99 Cents Only Stores
( NDN), 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.