RT KBH SVU WOR TXI LLTCWINDERMERE, Fla. (Stockpickr) -- Is there anything worse for a trader than being short a stock into an earnings report that surprises Wall Street and announces bullish fundamentals?Sure, there is: when those bullish fundamentals are enough to spark a massive short squeeze, sending the stock higher as bears are forced to cover their short positions due to an imbalance in supply and demand on the stock. Of course, if the company disappoints, then the bears have a license to hammer a stock with a high short interest significantly lower. That's why it's smart to scan the market for potential earnings short-squeeze candidates and pick the names that are displaying the best price action on strong volume going into their reports. These are the names that have the highest probability for an earnings short squeeze -- and for making a trader a lot of cash on the quick. Related: 3 Stocks to Sell Ahead of Market Correction There are a number of strategies that investors can deploy on heavily shorted stocks heading into their earnings reports. One strategy is to buy the stock ahead of the report looking for a big squeeze if you think the company is going to deliver strong results. I would advise readers to look for heavy volume above the three-month average daily activity on any stock that you use this strategy with. Also, that volume must be confirmed by bullish upside price action. If you don't see these characteristics, then I would wait for the report and see what transpires before placing your bets. Another strategy is to just wait for a company to report its numbers and witness strength in a stock before jumping in to ride the momentum and potential short squeeze. There's nothing wrong with getting conformation of the move first and missing some of the initial upside just to make sure you're on the right side of the trend. One more strategy is to use options to either hedge your position or just to buy outright bullish exposure on a stock before a company reports its earnings. Here's a look at some stocks that could experience a big short squeeze when they report earnings.
My first idea for an earnings short squeeze trade is Ruby Tuesday ( RT), which together with its subsidiaries develops, operates and franchises casual dining restaurants in the U.S., Puerto Rico, Guam and internationally. The company operates its restaurants under the Ruby Tuesday brand and also owns and operates two Wok Hay restaurants. Ruby Tuesday is set to report earnings on Jan. 5 after the close of the market. Wall Street analysts are looking for the company to report revenue in a range of $277.80 million to $281.80 million.
Another potential earnings short squeeze trade is KB Home ( KBH), which operates a homebuilding and financial services business serving homebuyers in markets nationwide. It constructs and sells homes through its operating divisions across the U.S. under the name KB Home. The company is set to report earnings on Jan. 7 before the market opens. Wall Street analysts are looking for revenue to come in between a very wide range of $377.49 million and $484 million.
One final stock that could be setting up for a big earnings short squeeze is SuperValu ( SVU), which operates food retail stores in the U.S. under the banners of Acme, Albertsons, Jewel-Osco and Save-A-Lot, to name a few. The company is set to report earnings on Jan. 11, and Wall Street analysts are looking for revenues to come in between $8.59 billion to $8.96 billion.
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