5 Earnings Stocks That Could Get Squeezed Higher

WINDERMERE, Fla. (Stockpickr) -- With earnings season in full swing on Wall Street, it's the perfect opportunity for market-players to create a powerful watch list of stocks that are due to report numbers and 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 and avoid big losses. Even the most dedicated short-sellers know that it's never a great idea to stay short once a big short-covering rally starts that's sparked by a bullish 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.

Related: 5 Rocket Stocks to Buy as Stocks Sell Off

Of course, 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. That way, you let the trend emerge after the market has digested all of the news.

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.

SodaStream International

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My first earnings short-squeeze candidate is SodaStream International ( SODA), which is set to report its results on Thursday before the open (and was recently highlighted in " 5 Stocks to Sell Ahead of Earnings"). 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 SodaStream to report revenue of $50.09 million on earnings of 22 cents per share.

I like this name ahead of the quarter since last quarter it beat big and the stock exploded higher. I see no reason why that earnings momentum won't show up again for this quarter. Also, if SodaStream issues bullish guidance, then this is going to be one of the last stocks on the planet you'll want to be short. Keep in mind that SodaStream inked a distribution deal with Best Buy ( BBY) on July 5, so sales could really come in above estimates with that kind of retail muscle behind the company in the next quarter.

The current short interest as a percentage of the float for SodaStream is an extremely large 25.2%. That means that out of the 13.75 million shares in the tradable float, 3.39 million are sold short by the bears. This is a large short interest on any stock, so a strong quarter and bullish guidance could set off a massive short squeeze for SodaStream.

From a technical standpoint, shares of SodaStream recently formed a double-top chart pattern at around $79.70 a share. After that topping pattern, the stock fell all the way down to a recent low of $62.20 a share, where shares found buying support. That buying support came in right around the 50-day moving average at the time, and that average is now $64.36 a share.

The way I would play SodaStream is to wait for the company to report and buy the stock off any large volume strength that takes it over $72.50 a share. I would add to any long position once you see SODA breakout above $79.72 a share on big volume. I want to see volume that's well above the three-month average action of 503,000 shares. I would only short this name after earnings on a big volume move below $62.20 a share.

Since this stock is trending above its 50-day despite the recent market slide, it might not be a bad call options play ahead of the quarter. Just make sure you buy some near-the-money calls and don't bet more than you're willing to lose.

Quepasa

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Another potential earnings short squeeze play is Quepasa ( QPSA), which is set to report results on Thursday during trading hours. This company owns and operates Quepasa.com, a social network and gaming platform for the Latin community. Quepasa delivers Latin audiences social Web in the form of a Latin online experience. Wall Street analysts, on average, expect Quepasa to report revenue of $2.73 million.

Expectations are low for Quepasa going into this quarter, and few analysts on Wall Street are following this company. That sets this stock up for an upside surprise since trends in the market are strong for social networking companies. We saw evidence of that when social networking player LinkedIn (LNKD) reported a strong quarter last week.

The current short interest as a percentage of the float for Quepasa is a very large 26.5%. That means that out of the 13.67 million shares in the tradable float, 3.4 million are sold short by the bears. This is a very low float and high short , which could produce a massive short-covering rally, but we will need a solid quarter and bullish guidance.

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From a technical standpoint, shares of Quepasa are trading below both the 50-day and 200-day moving averages, which is bearish. The stock has been slammed pretty hard recently, dropping from a recent high of $10.42 a share to its current price of just under $6 a share. The stock has started to find some buying support off of a previous support level at around $5.70 a share.

The way I would play Quepasa would be to buy this stock after its report if it holds above $5.60 to $5.70 a share. I would buy the stock on any strength after the quarter if that level holds and if you see upside volume that's either close to or above its three-month average action of 936,000 shares. I would only add to long positions on a big volume move above $7 a share and I would only short if it trades below $5.60 a share on big volume.

Royal Gold

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An earnings short-squeeze play in the gold and silver sector is Royal Gold ( RGLD), which is set to release numbers on Thursday before the market opens. This company, together with its subsidiaries, is engaged in the business of acquiring and managing precious metals royalties and similar interests derived from production. Wall Street analysts, on average, expect Royal Gold to report revenue of $59.35 million on earnings of 40 cents per share.

It's not hard to understand why shares of Royal Gold are currently trading just 4 points off of its 52-week high at $70.86 a share. The price of gold bullion has been red-hot to see the least, and this gold miner is one of the strongest acting names in the sector. In fact, as I write this, gold has just hit a new all-time higher over 1,779 an ounce. This should setup Royal Gold for a strong quarter, so all the bulls are going to need to take this one higher is for management to issue bullish guidance.

The current short interest as a percentage of the float for Royal Gold is a notable 7.2%. That means that out of the 51.42 million shares in the tradable float, 3.7 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 11%, or by about 368,000 shares. If the bears are caught leaning the wrong way on this gold player, then we could easily see a large short squeeze since the tradable float is pretty small.

From a technical standpoint, shares of Royal Gold are looking very bullish, with the stock trending above both its 50-day and 200-day moving averages. The stock has also just found some big buying support and formed a double-bottom chart pattern at $63.30 a share.

The way I would play this stock would be to simply buy some shares after the report if Royald Gold triggers a big breakout above some past overhead resistance at $70.68 a share on heavy volume. A move above that level would put Royal Gold at a new 52-week high, and that will likely bring in lots of momentum traders. New highs will also scare the shorts since it will mean there's little resistance left to hold the stock back. I would only short this stock if it moves below $63.30 after the report on big volume. Add to any short position if the stock then takes out its 50-day moving average of $61.52 a share with strong volume.

Since this name is looking so strong technically, and the fundamental backdrop is bullish, it might be another play worth buying some near-the-money call options ahead of the report. Just remember, only a breakout is going to make those calls valuable, so if it doesn't happen the calls won't work.

Red Robin Gourmet Burgers

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An earnings short-squeeze play in the casual dining sector is Red Robin Gourmet Burgers ( RRGB), which is set to release numbers on Thursday after the close. This company, together with its subsidiaries, is a casual dining restaurant chain focused on serving gourmet burgers. It owns and operates and franchises or licenses restaurants in the U.S. and Canada. Wall Street analysts, on average, expect Red Robin Gourmet Burgers to report revenue of $213.04 million on earnings of 36 cents per share.

Gas prices have been trending lower for much of the quarter at Red Robin as oil prices fell with the end of quantitative easing (QE2). This should have spurred more business at Red Robin since consumers had more money to spend at casual dining spots. This stock has also held up pretty well during the recent market slide, with shares only 7 points off its 52-week high of $39.32 a share. Revenues have also been trending up for the past three straight quarters at Red Robin.

The current short interest as a percentage of the float for Red Robin is a rather large 14.9%. That means that out of the 12.83 million shares in the tradable float, 2 million are sold short by the bears. It's worth noting that the bears have also increased their bets from the last reporting period by 6.3%, or by about 121,000 shares. This stock has a very low float and high short interest. If Red Robin reports a good quarter and guides higher, then a big short squeeze could easily be sparked.

From a technical standpoint, shares of RRGB are currently trading below the 50-day moving average and above the 200-day moving average, which is neutral trendwise. The stock recently dropped from a high of $39.32 a share to its current price of just under $32 a share.

The way I would play RRGB would be to buy the stock after the report if you see this name trade above some overhead resistance at $34 a share on strong volume. I would add to any long position if you see RRGB move above its 50-day moving average of $35.36 a share on big volume. Look for volume that's close to or well above its three-month average action of 339,000 shares. I would only short this name after earnings on a drop below $29.49 a share on big volume. Add to any short position if it then takes out its 200-day moving average of $26.56 a share.

Energy XXI

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One final earnings short squeeze play is Energy XXI ( EXXI), which is set to release numbers on Wednesday after the market close. This company, together with its subsidiaries, engages in the acquisition, exploration, development, and operation of oil and natural gas properties onshore in Louisiana and Texas and offshore in the Gulf of Mexico. Wall Street analysts, on average, expect Energy XXI to report revenue of $280.59 million on earnings of 51 cents per share.

I like this stock as an earnings short-squeeze play because shares of Energy XXI have been beaten-down badly in just the last few weeks, from a recent high of $35.08 a share to its current price of around $22.50 a share. I also like this name because it has recently found some buying support at around $21 a share, which is a support level where buyers stepped into the stock back in November of 2010.

The current short interest as a percentage of the float for EXXI is reasonably high 9.2%. That means that out of the 57.31 million shares in the tradable float, 5.8 million are sold short by the bears. This is more than enough shorts in a stock to spark a solid short covering rally if EXXI can produce a solid report and issue bullish guidance.

From a technical standpoint, shares of EXXI are currently trading below both its 50-day and 200-day moving averages, which is bearish. That said, the stock is trading at extremely oversold levels with the relative strength index showing a reading of 21. An RSI reading under 30 is often a level where stocks rebound sharply from.

The way I would play EXXI is to be a buyer of this stock after they report if shares hold above that major support level at $21 a share. If that level holds following their earnings, I would jump into this name and add to any long position above $24.50 a share. Look for a strong volume up move that registers volume that's close to or above its three-month average action of 963,000 shares. I would only short this stock on a big volume move below $21 a share following their earnings.

To see more potential earnings short squeeze candidates, including Renren ( RENN), InterOil ( IOC) and NVIDIA ( NVDA), 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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