8 Stocks That Could Get Squeezed Higher

WINDERMERE, Fla. (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, which can cause a gigantic short squeezes to 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 them 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 it's important to use trading discipline and sound money management when playing earnings short-squeeze candidates. First, don't ever bet any amount 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.

Related: 6 Stocks With Big Insider Activity

Remember, you can wait until after the report to trade the stock so you have a better idea of what the trend is. That said, you can miss a lot of the gains if a stock gaps big to the upside or downside right after an earnings report, so trade these plays in the style that you're most comfortable with.

Here's a look at a number of stocks that could experience big short squeezes when they report earnings this week.

Advanced Auto Parts

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My first earnings short-squeeze play is Advanced Auto Parts ( AAP), which is scheduled to release its results on Wednesday after the market close. This company is a specialty retailer of automotive aftermarket parts, accessories, batteries and maintenance items primarily operating within the U.S. Wall Street analysts, on average, expect this company to report revenues of $1.92 billion on earnings of $1.38 per share.

Advanced Auto Parts is the second-largest U.S. retailer of automotive parts and accessories. This company has beaten Wall Street estimates for the last four quarters in a row. Considering the recent trend in gasoline prices, and the lack of job creation in the overall U.S. economy, there's a good chance that AAP is going to exceed analyst estimates again this quarter.

It also doesn't hurt that a company that operates in a similar space, Monro Muffler Brake ( MNRO), a provider of undercar repair and tire services, just reported a profit beat for the fourth quarter that has sent its stock up over 9% today.

The current short interest as a percentage of the float for AAP is a notable 6.2%. That means that out of the 81.14 million shares that are in the tradable float, 4.9 million are currently sold short by the bears as of April 29. It's worth noting that the bears on AAP have also been increasing their bets as of the most recent reporting period by around 7.6%, or by about 345,000 shares. If those bears are caught leaning the wrong way heading into the quarter, then we could easily see a solid short-squeeze.

From a technical standpoint, this stock just jumped about 7 points in the last couple of weeks from $65 a share to a recent high of $72.32. That recent high marked a brand-new 52-week high for AAP, so the stock is showing some strength heading into the quarter. As long s this stock stays above its recent breakout prices of $69 to $69.38 a share, then this could be a good long play ahead of the quarter.

One way you could play this is to buy some out-of-the-money call options ahead of the quarter if you think AAP is going to beat and react bullish to their report. Another way is to wait until they report, and if the stock is trending higher buy it hand over fist once it takes out its all-time high of $72.32 a share.

One big bullish bet on AAP comes from Clovis Capital Management, which increased its position in the stock by 150% in the most-recent period.

SodaStream International

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My next earnings short-squeeze trade idea is SodaStream International ( SODA), which is set to report its results on Wednesday before the market opens. This company, along with its subsidiaries, is engaged in developing, manufacturing and marketing home beverage carbonation systems and related products. Wall Street analysts, on average, expect SodaStram to report revenue of $41.54 million on earnings of 15 cents per share.

The home-based drink makers have been on fire lately. All you have to do is look at what Green Mountain Coffee Roasters ( GMCR) did when it reported just a few weeks ago. The stock skyrocketed higher, crushing the short-sellers. SodaStream operates in the same niche market for home-based drink makers, which I believe gives this company a good chance to beat and raise its forecast for the quarter.

The company also recently expanded into Japan through a distribution agreement with Synergy Trading Corporation, the world's second largest retail market after the U.S. This aggressive move into international markets could also give a boost to SodaStream for the current quarter.

The current short interest as a percentage of the float for SodaStream is an extremely large 38.2% as of April 29. That means that out of the 13.28 million shares in the tradable float, 3.36 million are short by the bears as of April 29. These short-sellers have increased their bets dramatically from the last reporting period by around 40.8%, or by about 973,000 shares. Due to SodaStream's extremely low float and large recent increase in short bets, this stock has a great chance of producing a huge short squeeze.

From a technical standpoint, SodaStream is currently trading right around its 50-day moving average of $43.38 a share. As long as the stock can hold that level going into the quarter, then we have a good chance to see higher prices. One strategy that you could use is to buy some out-of-the-money call options ahead of the quarter. Another way to play this is to wait until they report, and see if the stock starts gapping up. If we get that kind of action, buy the stock and add to your position if it takes out $46.25, and then add again if it moves above its all-time high of $48.64 a share.

Aruba Networks

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Another earnings short-squeeze candidate is Aruba Networks ( ARUN), which is due to report results on Thursday after the market close. This company connects local and remote users to corporate information technology resources via distributed enterprise networks. Wall Street analysts, on average, expect Aruba to report revenue of $98.11 million on earnings of 15 cents per share.

Aruba Networks has beaten analyst estimates in seven out of the past eight quarters, and it met estimates the one time it didn't beat. During this impressive run, Aruba's stock has trended higher each time it beat estimates. That said, what's most important here for Aruba is that they don't just beat, but raise their forecast. A beat won't be enough because the stock is already trading a lofty valuation of 44 times forward earnings.

The current short interest as a percentage of the float for Aruba sits at around 12.2% as of April 29. That means that out of the 94.19 million shares in the tradable float, 11.47 million are sold short by the bears. The bears have been adding to their positions aggressively during the most recent reporting period by around 14.1%, or about 1.4 million shares. This sharp increase going into the quarter could produce some notable short-covering if Aruba can beat again.

From a technical standpoint, I don't like that Aruba has broken below its 50-day moving average of $32.22 a share on heavy volume. However, the stock does have some near-term support at around $28.50 to $27.60 a share. If the stock can hold those support levels going into the quarter, then you could take a shot from the long side here.

One way to play this is to buy some out-of-the-money calls into the quarter if you're bullish and the stock holds those support levels I mentioned. Another strategy is to just wait until they report and only buy the stock if it's trending higher and gets above its 50-day moving average. I would then add to the position if it moves above some near-term overhead resistance at around $33.50 a share, and then add again if it takes out its all-time high of $36.40 a share.

I also highlighted this stock last month in " Beaten-Down Tech Stocks Set to Bounce."

Salesforce.com

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Another tech stock that's heavily shorted going into its earnings report is Salesforce.com ( CRM), a provider of enterprise cloud computing applications, which is set to release numbers on Thursday after the market close. Wall Street analysts, on average, expect Salesforce.com to report revenue of $482.45 million on earnings of 27 cents per share.

Salesforce.com is one of the riskier names heading into the quarter because the stock is trading at a forward price-to-earnings of 69. This doesn't leave them much room for failure when it reports earnings since that valuation is at such a premium to most socks in the market. That said, the company has shown in the past it can beat analysts' estimates and trend higher following their earnings report.

The current short interest as a percentage of the float for Salesforce stands at 8.6% as of April 29. That means that out of the 121.39 million shares in the tradable float, 10.45 million are sold short by the bears. From a technical standpoint, this stock recently broke below its 50-day moving average of $131.54 a share. The stock has also started to trade below some near-term support at around $129 to $128.20 a share. That said, the stock has fallen from its April highs of $142 to its current price of around $127. This could set the stock up for a short squeeze rebound if Salesforce can deliver solid results.

I would only be a buyer of this stock ahead of the quarter if it holds above its 200-day moving average of $125.87 a share. Any break below that level and I would be bailing out of this name. One way to play this into the quarter is to wait until after they report and only jump in if we see the stock can hold that 200-day moving average.

Wet Seal

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If you're looking for a earnings shorts-squeeze candidate in the retail space, then consider Wet Seal ( WTSLA), which is set to release numbers on Thursday after the market close. This is a national specialty retailer operating stores selling fashionable and contemporary apparel and accessory items designed for female customers aged 13 to 35 years old. Wall Street analysts, on average, expect the company to report revenue of $155.68 million on earnings of 8 cents per share.

This company recently reported its best same-store sales figures since April 2008, and they subsequently raised their first-quarter outlook as a result. Wet Seal now has a new CEO and considering that guidance, it looks like the right person is at the helm to turnaround this company. Often times with turnaround situations, all the company needs to do is show that it's on the right path towards change and profitability.

The current short interest as a percentage of the float for Wet Seal is a rather large 19.2% as of April 29. That means that out of the 93.64 million shares in the tradable float, 17.8 million are sold short by the bears. The shorts have been increasing their reports from the last reporting period by around 5.5%, or by about 928,000 shares.

From a technical standpoint, this stock recently broke out above some past overhead resistance at around $4.80 a share. The stock has since then traded down a bit and is now changing hands at around $4.70. As long as Wet Seal trends above some big near-term support at around $4.30 a share going into the quarter, then I want to be a buyer of this stock. If we get a big short squeeze here, then I would add large if the stock takes out $4.94 following the report, and add even more to your position if it takes out two-year highs at $5.25 a share.

Wet Seal shows up on recent lists of 6 Retail Stocks Lifting Guidance3 and High-Quality Stocks With Price Momentum.

Heavily Shorted Retail Stocks

Two more heavily shorted retail stocks that are worth putting on your radar as earnings short squeeze candidates this week are Children's Place Retail ( PLCE) with over 18% of the float short, and Zumiez ( ZUMZ), with over 25% of the float sold short. Children's Place reports on Friday before the market opens, and Zumiez reports on the same day after the market close.

To see more potential earnings short squeeze candidates, including Foot Locker ( FL), Sears Holdings ( SHLD) and GameStop ( GME), 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.

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