5 Stocks Set to Soar on Bullish Earnings

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 due to report numbers 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 great idea to stay short once a big short-covering rally is 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.

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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 off a short squeeze. This way, you're letting the trend emerge after the market has digested all of the news.

Of course, 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 rip higher.

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

Micron Technology

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My first earnings short-squeeze candidate is Micron Technology ( MU), which is set to report its results on Thursday after the market close. This company, together with its subsidiaries, engages in the manufacture and marketing of semiconductor devices worldwide. Wall Street analysts, on average, expect Micron Technology to report revenue of $2.14 billion on earnings of 2 cents per share.

If you're looking for a beaten-down stock in front of the quarter, then shares of Micron Technology should really fit the bill. This stock has been hammered lower during the past six months, with shares falling from a May high of $11 a share to its current price of just under $6.50 a share.

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The current short interest as a percentage of the float for Micron stands at 6.3%. That means that out of the 977.21 million shares in the tradable float, 61.8 million are sold short by the bears. This isn't a high short interest or a low float, but with over 60 million shares held short, it's more than enough to spark a solid short-covering rally if the bulls hear what they're looking for.

From a technical standpoint, this stock is currently trading below both its 50-day and 200-day moving averages, which is bearish. The stock recently put in a double bottom at around $5.20 a share and hit selling resistance at $7.42 a share.

If you're bullish on this company, I would buy this stock after its report if it can break out above $6.77 a share on big volume. Look for volume that's tracking in close to or above its three-month average volume of 39.3 million shares. I would add aggressively to any long trade if the stock then takes out $7.42 a share on solid volume. I would target a run back towards $8.20 to $9 a share if the bulls spark a short-squeeze post-earnings.

I would short this name after earnings only if the stock drops below some near-term support at $6.22 a share on big volume. I would add to any short bets if the stock then takes out $5.20 with volume. Bearish traders should target a fall towards $4.20 or possibly even lower if the bears smack this down post-earnings.

Micron, one of the top holdings at David Tepper's Appaloosa Management, shows up on recent lists of 7 Tech Stocks With Limited Downside and 6 Stocks Under $7 With Upside.

Worthington Industries

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Another potential earnings short-squeeze trade is Worthington Industries ( WOR), which is set to report results on Wednesday after the market close. This is a diversified metals processing company, focused on steel value-added steel processing and manufactured metal products. Wall Street analysts, on average, expect Worthington to report revenue of $626.97 million on earnings of 39 cents per share.

This is another name that the bears have destroyed in front of the quarter, since shares are down sharply from the July highs at $23.54 a share to the current price of just under $15 a share. The last time Worthington report earnings, it beat Wall Street estimates of 56 cents per share, reporting 70 cents per share. If we get another beat with this report and the company ups guidance, then this stock could easily see a huge short squeeze.

The current short interest as a percentage of the float for Worthington is rather large at 10.8%. That means that out of the 55.9 million shares in the tradable float, 5.88 million are sold short by the bears. This is a reasonably low float and high short interest situation that can produce a sharp move higher if the bears scramble to cover some of their bearish bets.

From a technical standpoint, this stock is currently trading below both its 50-day and 200-day moving averages, which is bearish. This stock formed a double top back in July at around $23.50 a share and since then has dropped to a recent low of $12.84 a share. Since hitting that low, the stock has rallied back up to just over $15 a share.

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If you're bullish on this name, I would wait until after they report and buy the stock once it breaks out above $15.50 a share on big volume. Look for volume that's tracking in close to or above its three-month average action of 1 million shares. I would add to any long positions once the stock then takes out its 50-day moving average of $16.98 a share and target a run back towards the 200-day moving average at $19.04 a share.

I would get short this name only if the stock drops below $12.84 after earnings on big volume. I would add to any short bets if the stock then takes out some big support at $11.63 a share on heavy volume. I would target a drop back towards $10 or possibly even lower if the bears take control of this name post-earnings.

Worthington is one of the 20 highest-yielding metals and mining stocks.

AZZ

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An earnings short-squeeze trade in the technology sector is AZZ ( AZZ), which is set to release numbers on Thursday after the market close. This is an electrical equipment and components manufacturer, serving the global markets of power generation, transmission and distribution, and the general industrial markets. Wall Street analysts, on average, expect AZZ to report revenue of $115.87 million on earnings of 76 cents per share.

The current short interest as a percentage of the float for AZZ is a notable at 4.9%. That means that out of the 11.99 million shares in the tradable float, 587,631 are sold short by the bears. This is a stock with a very low float and a reasonable short interest. If the AZZ can beat Wall Street estimates and issue bullish guidance, then a big short squeeze could easily kick off.

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From a technical standpoint, this stock is currently trading below both its 50-day and 200-day moving averages, which is bearish. The stock formed a double top back in July at around $53 a share and since then dropped to low hit this month at $38.77 a share. Since hitting that low, the stock has rebounded back up to $41.42 a share which is just below its 200-day moving average of $43.10.

The way I would play this stock is to wait until after its report and buy the stock if it trades back above its 200-day moving average on big volume. Look for upside volume that's tracking in close to or above its three-month average action of 108,500 shares. I would add to any long position if the stock then trades above its 50-day of $45.31 with solid volume. Target a run back towards $48 or possibly higher if the bulls gain full control of this stock post-earnings.

I would get short this name if the stock fails near or at its 200-day moving average following its earnings report. I would target a drop back towards $38.77 a share which is the nearest support zone or possibly even lower if the bears whack this stock lower post-earnings.

AZZ is one of TheStreet Ratings' top-rated electronic instruments stocks.

Xyratex

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An earnings short-squeeze play in the computer storage devices industry is Xyratex ( XRTX), which is set to release numbers on Thursday after the market close. This is a provider of modular enterprise-class data storage subsystems and storage process technology. Wall Street analysts, on average, expect Xyratex to report revenue of $351.16 million on earnings of 18 cents per share.

This stock is looking strong in front of the quarter since it managed to breakout intraday on Tuesday above $9.08 a share. This breakout happened after the stock found some big buying support at around $7.60 a share during the past two months. That stock failed to close above the breakout price but it closed only 8 cents off that level at $9 a share.

The current short interest as a percentage of the float for Xyratex is just over 6%. That means that out of the 29.63 million shares in the tradable float, 1.87 million are sold short by the bears. The short-sellers have also been increasing their bets from the last reporting period by 5.9%, or by around 104,400 shares. If the bears are caught learning the wrong way here heading into the quarter, then we could easily see a large short-squeeze develop.

From a technical standpoint, this stock is trading above its 50-day moving average and below its 200-day moving average, which is neutral trendwise. That said, the stock is starting to challenge that stiff overhead resistance and breakout zone at $9.08 a share. The challenge of that resistance level is coming after the stock traded sideways for the past two months, between $7.50 and $9.08 a share.

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The way I would play this name is to wait until after its report their results and buy the stock if it manages to hold above that key breakout level of $9.08 a share. If that level holds, I would buy the stock off any strength and add to long positions once it then takes out $10.50 a share with volume. Look for volume tracking in close to or above its three-month average action of 317,000 shares. Target a run back towards $12 a share or possibly even higher if the bulls can spark a short-squeeze post-earnings.

I would short this name after earnings only if the stock trades back below its 50-day moving average of $8.75 a share on solid volume. I would add to any short position if the stock then takes out that important support zone at around $7.50 a share. Target a drop back towards $6 a share if the bears hammer this lower post-earnings.

Xyratex is one of the top-yielding computer hardware stocks.

DemandTec

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One more earnings short-squeeze play is DemandTec ( DMAN), which is set to release numbers on Thursday after the market close. This is a provider of on-demand optimization solutions to retailers and consumer products companies. Wall Street analysts, on average, expect DemandTec to report revenue of $22.02 million on a loss of 2 cents per share.

Barrington Research has issued a research report on DemandTec ahead of the quarter maintaining its outperform rating and $7.50 price target on the stock. This stock has been absolutely crushed in the past six months with shares dropping from a May high of $11.06 to its current price of just over $6 a share.

The current short interest as a percentage of the float for DemandTec stands at 7.3%. That means that out of the 29.52 million shares in the tradable float, 2.31 million are sold short by the bears. The bears have also been increasing their bets from the last reporting period by 9.2%, or by about 5.6 million shares. It's worth pointing out that the bears have also been increasing their bets from the last reporting period by 4.4%, or by about 97,700 shares.

From a technical standpoint, this stock is currently trading below both its 50-day and 200-day moving averages, which is bearish. This stock is the poster child for a bearish trending equity since shares have been printing lower highs and lower lows since April. That said, the stock has started to find some buying support recently at around $5.40 to $5.50 a share.

The way I would play this stock is to buy some shares after it releases its results if the stock can trade above its 50-day of $6.45 and above some overhead resistance at $7 a share. Look for volume that's tracking in close to or above its three-month average action of 363,300 shares. This stock could run up towards $8 a share or possibly higher if the bulls can spark a solid short-squeeze.

I would get short this stock after earnings only if the stock fails to trade back above at its 50-day moving average. I would add to any short position once the stock then trades below $5.40 to $5.25 a share on heavy volume. Target a drop back below $5 or possibly even lower if the bears can push this stock lower post-earnings.

To see more potential earnings short squeeze candidates, including Thor Industries ( THO), Texas Industries ( TXI) and Mosaic ( MOS), 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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