WINDERMERE, Fla. (Stockpickr) -- With earnings season under way, it's time 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 bullish earnings report sparks a big short-covering rally. This is why I scan 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. >>6 Dividend Stocks for Earnings Season 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 risk missing a lot of the move. That's why it can be worth betting prior to the report -- but only if the stock is acting extremely bullish technically and you have a very strong conviction that it's 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.
First Cash Financial Services
Buffalo Wild WingsOne earnings short-squeeze play in the restaurant sector is Buffalo Wild Wings ( BWLD), which is set to release numbers on Wednesday after the market close. This company engages in the ownership, operation, and franchise of restaurants in the U.S. Wall Street analysts, on average, expect Buffalo Wild Wings to report revenue of $190.31 million on earnings of 59 cents per share. This company missed estimates last quarter by 2 cents and beat Wall Street estimates by 8 cents in the first quarter. Profits have jumped year-over-year by an average of 25.7% over the past five quarters. Heading into the quarter, the stock is trading about 10 points off of its 52-week high of $69.52 a share. The current short interest as a percentage of the float for Buffalo Wild Wings is rather high at 12.7%. That means that out of the 18.03 million shares in the tradable float, 2.3 million are sold short by the bears. This stock has an extremely low float and a very high short interest. Any bullish earnings news could spark a massive short-squeeze this week. From a technical standpoint, this stock is currently trading below its 50-day moving average and just above its 200-day moving average, which is neutral trendwise. Back in July, the stock formed a double top at around $69.24 to $69.52 a share. Since forming that topping pattern, the stock plunged to an August low of $52.37 a share. Shares have since rallied back to its current price of just over $58 a share. The way I would play this name is to wait until after it report its results and buy this stock if it trades back above its 50-day moving average of $60.07 a share and above some big overhead resistance at $60.35 a share with volume. Look for volume that's tracking in close to or above its three-month average volume of 399,700 shares. If those levels are taking out after earnings, with volume, then look for this stock to make a run at $65.50 a share or possibly even higher. I would short this name after its report only if the stock drops below $57 a share on big volume. I would add to any short position once the stock then takes out $54.28 a share, and target a drop back towards $52 or possibly even lower if the bears hammer this lower post-earnings. Buffalo Wild Wings, one of TheStreet Ratings' top-rated restaurant and hotel stocks, shows up in the portfolio of Wilbur Ross' Invesco Private Capital as of the most recently reported period.
8x8My final earnings short-squeeze candidate for today is 8x8 ( EGHT), which is set to release numbers on Wednesday after the market close. This company develops and markets telecommunications services for Internet protocol, telephony and video applications, as well as Web-based conferencing and unified communications services, managed hosting and cloud-based computing services. Wall Street analysts, on average, expect 8x8 to report revenue of $18.94 million on earnings of 3 cents per share. Net income for 8x8 is set to double as the company looks to report earnings of 3 cents a share for the fifth consecutive quarter in a row. The stock is trading very strong ahead of the quarter with shares just about one point off its 52-week high of 5.44 a share. The current short interest as a percentage of the float for 8x8 stands at 11.4%. That means that out of the 50.52 million shares in the tradable float, 6.77 million are sold short by the bears. This is a low priced stock with a low float and high short interest. If we get a strong quarter that Wall Street likes, then look for shares of EGHT to soar following their report. From a technical standpoint, this stock is currently trading above both its 50-day and 200-day moving averages, which is bullish. For the past couple of months, the stock has been making mostly higher lows and higher highs as it has run from $3 to a recent high of $4.95 a share. The stock is now trading just above its 50-day moving average of $4.11 a share. If you're bullish on this stock, I would wait until after its report and buy some shares if it breaks out above $4.70 to $4.95 a share on heavy volume. Look for volume that's tracking in close to or above its three-month average action of 1.25 million shares. I would then add aggressively to any long position if the stock takes out its 52-week high of $5.44 with volume. Shares of 8x8 haven't traded above $5.44 since 2004, so look to get long thing stock if it takes that level out with volume. To see more potential earnings short squeeze candidates, including Harley-Davidson ( HOG), Knight Capital Group ( KCG) and Pinnacle Financial Partners ( PNFP), check out the Earnings Short Squeeze Plays portfolio on Stockpickr. -- Written by Roberto Pedone in Winderemere, Fla.
Twitter and become a fan on Facebook. 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.