WINDERMERE, Fla. (Stockpickr) -- The last thing any short-seller wants is to be caught short a stock going into an earnings report when a company delivers a strong set of numbers.
That problem will be confounded if the short-seller is betting against a heavily shorted equity. When the bears are wrong, and a stock is heavily shorted, then the market can deliver some true pain as short-covering pushes the stock up to obscene levels. This scenario can create a "perfect storm" for a stock because the natural buyers combined with the short-covering will spike the stock noticeably.
This is exactly why 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 in a year to help enhance your portfolio returns. When the gains are outsized in such a short timeframe, your profits can add up quickly.
Of course, stocks are heavily shorted for a reason, so you have to use trading discipline and sound money management when trading earnings short-squeeze candidates. First, don't ever bet the farm on one of these plays. Keep your bets reasonable and only use risk capital. 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, as well as a couple you actually might consider jumping on board with the bears and shorting.
My first earnings short-squeeze play is
, which is scheduled to release its results on Wednesday. This precious metals company is engaged in the exploration and development of mineral properties in Alaska, the U.S. and British Columbia, Canada. Wall Street analysts, on average, expect the company to report earnings of a loss of 5 cents per share. There currently are no estimates on revenues.
This company should be benefiting tremendously from
. NovaGold also mines for
, zinc and lead ores, which should also give it an earnings boost in the current quarter, since we've been in a rising inflationary environment since the announcement of the second round of quantitative easing. NovaGold dubs itself as a low-cost gold producer, with cash costs in the lower half of the industry. If they were able to live up to that claim, then they should have no problem reporting strong results.
The current short interest as a percentage of the float for NG is 6.8%. That means that out of the 142.24 million shares that are in the tradable float, 13.86 million are currently sold short by the bears as of March 31. This is a reasonable short interest. If NG delivers bullish news, then we should see some notable short-covering.
From a technical standpoint, shares of NovaGold have just started to trade below its 50-day moving average of $13.53. The stock also just failed to break above a descending trend line which would've been bullish. I would only buy this for an earnings short squeeze if the stock trades back above the 50-day or if you buy it off of near-term support near $12 and use a very tight mental stop.
NovaGold, a top holding in both
as of the most recently reported period, shows up on a recent list of
. I also highlighted last week in "
My next earnings short-squeeze trade idea is
, which is set to report its results on Thursday after the market close. This biopharmaceutical company is focused on the research, development and commercialization of pharmaceutical products that address unmet medical needs in the acute care environment. Wall Street analysts, on average, expect Cubist to report revenue of $155.78 million on earnings of 28 cents per share.
have been hot this year, and a number have reported strong earnings in the past couple of months. Just take a look at
and you'll see what I mean. Cubist could be the next to follow in this trend. The company also recently settled a patent litigation with
, sending the stock up 13%.
The current short interest as a percentage of the float for Cubist is a decent 9.7%. That means that out of the 59.45 million shares in the tradable float, 6.32 million are currently sold short by the bears as of March 31. This is a situation where the float is small and the short interest is more than high enough to cause massive short-covering if Cubist reports solid results.
From a technical standpoint, there's a huge gap up in price on the chart of Cubist from around $25 a share to just under $29. As long as the stock doesn't trade into that gap before earnings, then I would take a shot from the long side here with Cubist. If the stock does experience a short squeeze, I would add heavily to the position if it takes out $30.71 following earnings.
Another strategy you could use is to simply wait until after the report and only go long if it breaks out above $30.38. Keep in mind that some big volume has been moving into this name during the past few trading sessions, so this stock is already starting to heat up.
Cubist Pharmaceuticals, one of TheStreet Ratings'
, was one of
Bank of the Ozarks
Another earnings short-squeeze candidate is
Bank of the Ozarks
, which is due to report results on Wednesday after the market close. Bank of the Ozarks, a bank holding company, provides a range of retail and commercial banking services. Wall Street analysts, on average, expect this company to report revenue of $45 million on earnings of 69 cents per share.
My thesis here is to buy some of the technically strong bank stocks into their earnings because expectations are so low that if they beat numbers, these heavily shorted names will see massive short-covering. Even a modest rebound and reasonable forecast out of some of the bank stocks could cause a relief rally in shares.
The current short interest as a percentage of the float for OZRK is a rather large 18.7% as of March 31. That means that out of the 14.02 million shares in the tradable float, 2.78 million are currently sold short by the bears. This is an extremely small float with a large short interest. If Bank of the Ozarks beats the Street, it could easily see a short squeeze that pushes the stock up to new highs.
From a technical standpoint, this stock has already started to break out above some past overhead resistance at around $44.50 a share. I would be a buyer of this stock right now and add to the position once it takes out its
of $45.53. I would get out of this trade quickly if it starts to trend lower following their earnings -- or if you want a wider mental stop, use the 50-day moving average of $43.48 a share.
Bank of the Ozarks is one of TheStreet Ratings'
More Bank Stocks
Two more heavily shorted banks that could get squeezed higher following their earnings reports this week are
, which has a short interest of 9.5%, and
, which has a current short interest of 10%. Prosperity Bancshares is set to report on Thursday before the market opens, and Independent Bank reports on Thursday after the market close.
I wouldn't consider using my earnings short-squeeze strategy with either banking giant
Bank of America
, set to report on Friday before the market opens. Neither stock is heavily shorted.
Technically, JPMorgan Chase is the better-looking of the two, but I would only be a buyer if it takes out some overhead resistance at around $48 a share. Bank of America's chart looks like death, and I would avoid it completely. You can short BAC if the stock falls below some near-term support at around $13.16 a share. Bank of America is set to report on Friday before the market opens.
Shifting gears, one stock I would actually consider shorting in front of its earnings is
, which is set to report on Thursday after the market close. This company is focused on improving the ways people connect with information. Google generates revenue primarily by delivering online advertising. Wall Street analysts, on average, expect the company to report revenue of $6.32 billion on earnings per share of $8.13.
One reason I like going short Google into its report is because of the change in management to new CEO Larry Page. Wall Street will not like this stock if Page creates any uncertainty on the conference call over what direction he plans to take the company in. I also like the idea of shorting Google because the entire analyst community seems to be
. There are a number of investment banks that have $700 and higher price targets on Google going into the report. The pressure for a beat here is high, but the probability on the charts is screaming lower for the stock.
From a technical standpoint, Google's chart looks horrible heading into earnings. The stock has been making lower highs since late February, and it's now trading below its 50-day moving average of $594.80 a share.
One strategy you could use here is to wait for the company to report and quickly jump on a short trade if the stock starts to sell off. You could also speculate small into the report with some put options and look for the downtrend to continue. I would use front month puts that are out of the money and will go up in value if Google trades below its 200-day moving average of $557.81.
I have a feeling that Google is going to surprise the Street with not-so-great numbers and that's why the stock is acting technically bearish heading into earnings.
Google, one of
in the most recently reported period, shows up on recent lists 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.