WINDERMERE, Fla. (Stockpickr) -- One way to hurt your profit-and-loss statement is to be caught short a stock going into an earnings report when a company delivers a solid set of numbers.

When this happens, and especially when it happens to a stock that's heavily shorted, the market can deliver some true pain as short-covering causes the stock to skyrocket. This scenario can create a "perfect storm" for a stock as the natural buyers combined with the short-covering spike the stock higher.

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 -- the gains become so outsized in such a short timeframe that your profits add up quickly.

Related: 5 David Tepper Stock Buys for 2011

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 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 several stocks that could experience big short squeezes when they report earnings this week -- and one stock that could make for a profitable short.

Cheesecake Factory

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My first earnings short squeeze play is the Cheesecake Factory ( CAke), which is scheduled to release its results on Wednesday after the market close. This company operates upscale, casual and full-service dining restaurants in the U.S. The stock hasn't done much on the year, with shares down around 2.6%. Wall Street analysts, on average, expect the company to report revenue of $418.70 million on earnings per share of 33 cents.

Despite the recent rise in gas prices and food prices, I don't expect to see upscale casual dining outfits such as Cheesecake Factory get that hurt. Cheesecake Factory is extremely popular for its comfort food menu, and it's a go-to place for consumers who like to celebrate special occasions such as birthdays. The current economic environment just isn't bad enough to have stopped people for splurging at the Cheesecake Factory.

Let's also not forget that this company has beat analysts' per-share earnings numbers in each of the past four quarters, according to Thomson Reuters. This sets up CAKE for another earnings beat, and there should be plenty of new shorts in the stock hoping that soaring gas and food prices will topple the stock. The current short interest as a percentage of the float for CAKE sits at around 16.2%. That means that out of the 55.23 million shares that are in the tradable float, 8.11 million are currently sold short by the bears as of March 31. This is a rather high short interest on a stock that has a reasonably low trading float. If the bulls get what they want here, this stock should see a sizeable short squeeze.

From a technical standpoint, CAKE has just started to move above its 50-day moving average of $29.26 a share, which is bullish. The stock has also started to make short-term lower highs since the end of February, and it now looks ready to make a higher high if it can take out $30.74 a share.

I would either buy some call options ahead of earnings that are just out-of-the money, or buy the stock and add to the position following the report if it trades above $31 and then $32 a share. My target here is $33 to $34 if we get a short squeeze.

Chipotle

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My next earnings short-squeeze trade idea is Chipotle Mexican Grill ( CMG - Get Report), which is set to report its results on Thursday after the market close. This company and its subsidiaries operate restaurants throughout the U.S., as well as two restaurants in Toronto and one in London. Wall Street analysts, on average, expect Chipotle to report revenue of $494.78 million on earnings of $1.44 per share.

This company has been executing flawlessly for some time beating analysts' estimates by an average of 21% for the past eight quarters. There has been some talk that Chipotle will eventually get hurt by a slowing economy. First, that's not the case for the current quarter, at least when compare with last year. Second, I don't buy that argument altogether; if anything, consumers will turn to Chipotle in a slowing economy because their prices are so reasonable.

Let's also not forget that Chipotle is a leveraged play on the trend toward healthier eating. The company is still early into its expansion story so I think some of the calls that the stock is overvalued are misguided. Growth and continued innovation should continue to power this stock towards higher prices.

The current short interest as a percentage of the float for CMG is a decent 7%. That means that out of the 30.50 million shares in the tradable float, 2.41 million are currently sold short by the bears as of March 31. This is a decent short interest for a stock with a very low trading float. I expect to see CMG soar if the company can report solid numbers and more importantly bullish guidance. If it delivers on those two fronts, then the stock is going to see a massive short squeeze.

From a technical standpoint, CMG is very close to breaking out above some past overhead resistance at around $285.97 a share. You could either buy this stock or some slightly out-of-the money call options prior to the report for a play on this stock hitting $300 a share or higher. You could also wait for it report and jump into the stock if it starts spiking after fundamental results are confirmed bullish.

My target here again is north of $300 for CMG. I think a lot of traders are shorting this stock on valuation going into the quarter, and I think that's the wrong trade because the company is still too early into its global expansion.

One bet on the long side of the stock comes from Renaissance Technologies, as of the most recently reported quarter, though it also shows up on a recent list of 7 Big-Name Stocks to Sell. Chipotle is one of TheStreet Ratings' top-rated restaurant and hotel stocks, and it was featured earlier this week in as one of five stocks with long-term growth potential.

Cepheid

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Another earnings short-squeeze candidate is Cepheid ( CPHD), which is due to report results on Wednesday after the market close. This company is a molecular diagnostics company that develops, manufactures and markets integrated systems for testing in the clinical market, as well as for application in its legacy biothreat, industrial and partner markets. Wall Street analysts, on average, expect this company to report revenue of $57.26 million on earnings of a loss of 1 cent a share.

A number of biotech stocks, including Cubist Pharmaceuticals ( CBST), have recently reported very strong results, and I think Cepheid is setting up to do the same thing. Most of my thesis for Cepheid is based off of how strong the stock is acting technically going into the quarter. The stock is printing a brand new 52-week high as I write this. This is basically what Cubist was doing ahead if its quarter, and that stock jumped nicely after it reported.

The current short interest as a percentage of the float for CPHD is a rather large 12.3% as of March 31. That means that out of the 59.73 million shares in the tradable float, 7.38 million are currently sold short by the bears. This is another low-float, high-short-interest opportunity that could lead to a big short squeeze if the company can deliver strong results.

I would be a buyer of the stock ahead of the quarter and look for a 5% to 10% move higher. If you don't see this stock spiking higher right away, or if we don't get the spike higher at all, then dump it in after hours and trading and cut your losses quickly.

Patriot Coal

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If you think like I do that the coal sector is prime for some short squeezes this earnings session, then I would suggest taking a hard look at going long Walter Energy ( WLT) and Patriot Coal ( PCX) ahead of their earnings announcements. My biggest theme here is that coal companies are set to raise their guidance due to the Japanese earthquake and due to soaring crude oil prices. It doesn't hurt that WLT and PCX are also heavily shorted.

Patriot Coal is set to report its results on Thursday before the market opens. The current short interest as a percentage of the float for PCX is 8.1%. What's interesting here is that the bears have been adding to their positions from the last reporting period by around 7.7%, or by 519,000 shares.

I would be a buyer of this stock if it can trade above its 50-day moving average of $24.56 going into the quarter.

On the long side of Patriot Coal is Bill Gates' Cascade Investment, with a 2.4 million-share stake in the stock as of the most recently reported period. It was highlighted earlier this week as one of five mid-cap takeover targets and shows up on a recent list of 10 Coal Stocks With Upside.

Walter Energy

Walter Energy is due to report its results on Thursday after the market close. The current short interest as a percentage of the float for WLT stands at around 8.7%. The bears have also been increasing their bets on WLT from the last reporting period by around 11.5%, or 472,000 shares. I would be a buyer of some near-the-money call options on WLT or the stock outright prior to the report, and I would look for shares to trade back towards its 52-week high of 143.76.

On the long side of Walter are John Keeley's Keeley Fund Management -- the stock is its top holding -- and Ken Heebner's Capital Growth Management. Walter, one of TheStreet Ratings' top-rated metals and mining stocks, is also on the list of 10 Coal Stocks With Upside.

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Travelzoo

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Shifting gears, one stock that looks shortable in front of its earnings is Travelzoo ( TZOO - Get Report), which is set to report on Thursday before the bell. Travelzoo, a global Internet media company, informs over 20 million subscribers worldwide, as well as millions of Web site users, about the best travel and entertainment deals available from thousands of companies. Wall Street analysts, on average, expect the company to report revenue of $33.40 billion on earnings per share of 28 cents.

Normally, Travelzoo would make my list for a perfect short-squeeze candidate in front of earnings because the stock is so heavily shorted. The current short interest for TZOO stands at a whopping 35% as of March 31. I actually featured it last month as a breakout stock play, but over the past month, this stock has already squeezed from around $40 to a high of $84.84 a share. That's a quick double, so this sets up a situation where we could easily see a sell the news reaction once TZOO reports.

From a technical standpoint, this stock has started to make some lower highs since it hit that recent high of $84.84 a share. I would also like to point out that the stock has seen some heavy volume distribution days during the past couple of weeks. Downside volume has recently registered 2.9, 1.9 and 1.4 million shares vs. the three-month average trading activity of 604,000 shares.

I would look to short this stock as long as it doesn't trade above $82 a share prior to the report. This is a risky trade so tread carefully here because TZOO could easily get squeezed if they report a big number and guide higher. I think that probability here is greater for a selloff though, so watch this one closely today and see if opportunity presents itself.

To see more potential earnings short squeeze candidates, check out the Earnings Short Squeeze Plays 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.