8 Stocks That Could Surge on Earnings

WINDERMERE, Fla. (Stockpickr) --With earnings season in full swing on Wall Street, it's the perfect opportunity for market-players to create a watch list of stocks due to report that are also heavily shorted by the bears.

Short-sellers hate being caught short a stock that produces earnings that please the bulls. When this happens, we often see a tradable short squeeze develop as the bears rush to cover their positions to avoid big losses. Even the best short-sellers know that it's never a good idea to stay short once a big short-covering rally starts that's sparked by a positive earnings report.

This is why I search the market for heavily shorted stocks that are about to report earnings. You only need to find a few of these stocks 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. It's important that you don't go betting the farm on these plays and that you manage your risk accordingly. Sometimes the best play is to wait for the stock to break out following the report before you jump in to profit from off a short squeeze. This way, you're letting the trend emerge after the market has digested all of the news.

Related: 5 Stocks to Sell Ahead of Earnings 

That said, sometimes the stock is going to be in such high demand that you will miss a lot of the move. That's why it can be worth betting prior to the report - but only if you have a very strong conviction that the stock is going to explode higher.

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

Tesla Motors

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My first earnings short-squeeze candidate is Tesla Motors ( TSLA), which is set to report its results on Wednesday after the market close. This company designs, develops, manufactures and sells fully electric vehicles and electric vehicle powertrain components. Tesla commercially produces an electric vehicle, the Tesla Roadster. Wall Street analysts, on average, expect this company to report revenue of $48.79 million on a loss of 51 cents per share.

Higher gas prices should have helped push middle- to upper-class consumers into some of Tesla Motors' cars in the current quarter. Orders for its Model S electric sedan, which is slated to launch next year, are also tracking in strong, with Tesla closing in on 5,000 reservations at $5,000 for the down payment.

Tesla beat Wall Street estimates last quarter after it missed estimates in the quarter prior. What Wall Street is going to be watching is if Tesla was able to keep its costs in line and raise its gross margins. Last quarter, it raised its gross margin by 18.3%, but costs jumped 82.8% to $31 million from the prior year.

The current short interest as a percentage of the float for Tesla is an enormous 38%. That means that out of the 46.47 million shares in the tradable float, 18.27 million are sold short by the bears. The short-sellers have also been increasing their bets from the last reporting period by 3.1%, or about 543,000 shares. Since this stock is so heavily shorted, any good news or guidance could easily pop this stock big to the upside.

From a technical standpoint, shares of Tesla have been making higher lows and higher highs since April, which is bullish. The stock is currently trading above its 200-day moving average and right around its 50-day moving average. Shares of Tesla have found some recent buying support at $27.50 and have hit resistance at just over $29 a share.

The way I would play Tesla here is to wait for the company to report, then buy the stock if it trades above $30 to $31.50 on strong volume. I would add aggressively to any long positions if you see Tesla take out $33 a share, since that should put its 52-week of $36.42 into range. I would only short this stock post-earnings if you see it trade below $27.50 and then below its 200-day moving average ($26.64) on big volume.

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Entropic Communications

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Another potential earnings short squeeze trade is Entropic Communications ( ENTR), which is set to report results on Wednesday after the market close. This is a semiconductor company. Entropic designs, develops and markets systems solutions to enable connected home entertainment. Wall Street analysts, on average, expect Entropic to report revenue of $65 million on earnings of 18 cents per share.

If you're looking for a beaten-down earnings short-squeeze play, then Entropic might just be the right stock for you. It has been crushed in just the last couple of months after forming a double-top chart pattern at around $9.40 a share. Since then, shares have fallen all the way down to its current price of just below $7 a share. This sets the stock up for sharp rally if Entropic can report solid numbers and guide higher.

The current short interest as a percentage of the float for Entropic is an extremely large 33.4%. That means that out of the 84.76 million shares in the tradable float, 27.10 million are sold short by the bears. It's worth pointing out that the bears have also been increasing their bets from the last reporting period by 3.8%, or about 981,000 shares.

From a technical standpoint, shares of Entropic are trading below both the 50-day and 200-day moving averages, which is bearish. That said, the stock has started to find some decent buying on strong volume right around a longer-term support zone at $6.50 a share. The relative strength index is also at around 30, a level at which stocks are often considered oversold.

The way I would play Entropic is to wait for the company to report and then buy the stock if you see it trade above $7 a share on strong volume. I would simply trail my stops up if the stock takes out $7 since it could easily make a run back toward $9 a share. I don't see much reward in shorting this stock down here, but if it does drop below $6.46 following its earnings report, then you could take a short from the short side.

One could also buy some in-the-money or not too much out-of-the-money call options here on Entropic ahead of the quarter since the stock is so beaten down. The call options trade is more risky, but your risk will be defined at what you decide to put into the trade.

Zipcar

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One recent IPO that could make for a solid earnings short-squeeze play is Zipcar ( ZIP), which is set to release numbers on Wednesday after the market close. Zipcar, which operates a car sharing network, provides over 400,000 members, also known as Zipsters, with self-service vehicles that are located in reserved parking spaces throughout the neighborhoods where they live and work. Wall Street analysts, on average, expect this company to report revenue of $59.45 million on a loss of 23 cents per share.

Those higher gas prices and weak employment numbers for the past couple of months could have provided a big boost to business at Zipcar, since this company offers self-service cars by the hour or day to consumers looking to lower the costs and headaches of owing a car. Zipcar's hourly rates as low as $8, including gas and insurance, are highly attractive in this sluggish economy.

The current short interest as a percentage of the float for Zipcar is a very large 17.5%. That means that 4.3 million shares are currently sold short by the bears. The short-sellers have also been increasing their bets from the last reporting period by 8.9%, or about 356,000 shares.

From a technical standpoint, shares of Zipcar are currently trading above the 50-day moving average. Because the stock is recent IPO, it doesn't have enough data to plot its 200-day moving average yet. Shares of Zipcar have been making higher lows since June, which is bullish. However, it's also been making lower highs, which is bearish. This puts the stock in a pretty neutral standpoint from a trending basis.

The way I would play Zipcar is to wait for its report, then buy the stock if you see it trade above $24 a share on heavy volume. I would add to any long position if you see Zipcar move above $25.50 on solid volume. I would target $26 to $28 for this stock if we see a solid short-squeeze after it reports. I would only short this name following earnings if it drops below the 50-day moving average or $22.57 on big volume.

Zipcar was highlighted recently in " 2 IPO Pair Trades to Weather the Debt Debate Storm," and I featured it in July in " 5 Stocks Setting Up to Break Out."

GT Solar International

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One earnings short-squeeze play in the solar sector is GT Solar International ( SOLR), which is set to release numbers on Wednesday after the market close. This company through its subsidiaries is a global provider of polysilicon production technology, crystalline ingot growth systems and related photovoltaic manufacturing services for the solar industry. Wall Street analysts, on average, expect GT Solar to report revenue of $225.98 million on earnings of 31 cents per share.

This company has been firing on all cylinders going into the quarter, winning big contract after big contract. For example, on Tuesday they announced a $55.1 million deal in new orders from a customer in Asia for their polysilicon production equipment. I expect GT Solar to easily beat for this quarter, but that good news is probably already priced into the stock. This stock will only take off following earnings if they guide higher for the next quarter.

The current short interest as a percentage of the float for GT Solar is notable at 14.9%. That means that out of the 125.58 million shares in the tradable float, 18.73 are sold short by the bears. This is more than enough shorts to spark a big short covering rally if the company guides much higher for the next quarter.

From a technical standpoint, shares of GT Solar are currently trading below both the 50-day and 200-day moving averages, which is bearish. The stock has been in a nasty slide from early July, when it was trading at $17.50 a share, to its current price of around $13.60 a share. That said, the stock has found some buying support at close to $13 a share.

The way I would play GT Solar is to buy the stock after the report if you see it trade back above its 50-day moving average of $14.07 a share on big volume. A strong move through that level should set this stock up for a sharp move higher following their report. I would only short this stock after they report if it breaks below $13.11 a share on big volume. I would target the $12 to $11 areas from the short side if GT Solar trends down following earnings.

GT is one of TheStreet Ratings' top-rated semiconductor stocks.

Immunogen

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Another earnings short-squeeze play is ImmunoGen ( IMGN), which is set to release numbers on Thursday after the market close. This company is focused on the development of antibody-based anticancer therapeutics. Wall Street analysts, on average, expect ImmunoGen to report revenue of $4.41 million on a loss of 24 cents per share.

I like this biotech player going into the quarter because this is another heavily shorted stock that's been beaten down ahead of their earnings. Shares of ImmunoGen have dropped from a recent high at $16.20 a share to its current price of just below $13 a share. This nasty slide has happened in just a few weeks, so any good news out of this firm could easily spark a massive short-squeeze.

The current short interest as a percentage of the float for ImmunoGen is a rather high 9%. That means that out of the 67.61 million shares in the tradable float, 6.69 million are sold short by the bears.

From a technical standpoint, shares of ImmunoGen are currently trading above the 200-day moving average and just below the 50-day moving average, which is neutral trendwise. The relative strength index currently reads around 39, which is approaching extreme oversold conditions. An oversold reading on the RSI doesn't mean the stock can't go lower - it just means that it's an area to watch for sharp bounces if the bulls move back into the stock.

The way I would play ImmunoGen is to buy this stock after its report if you see shares trade above $13.50 to $14 a share on big volume. I would add to any long position above $14.50 and target $15 to $15.50 if this stock starts to trend up following earnings. I would only short this after the report if you see ImmunoGen slide below $12.50 a share on big volume. I would target $11.50 to $10.50 a share on the downside if the bears take over this stock following a poor earnings report.

A few more biotech and medical-related stocks that are heavily shorted that you might want to consider this week for an earnings short-squeeze play are Sequenom ( SQNM), with 22% of its float short, Optimer Pharmaceuticals ( OPTR), at 14.3% short, and Momenta Pharmaceuticals ( MNTA), with 16.3% of its float sold short. Momenta and Optimer report on Thursday before the bell, and Sequenom reports on Thursday after the market close.

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.

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