5 Earnings Stocks That Could Squeeze the Bears

The following commentary comes from an independent investor or market observer as part of TheStreet's guest contributor program, which is separate from the company's news coverage.

WINDERMERE, Fla. ( Stockpickr) -- With earnings season under way on Wall Street, 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.

As a shorted stock produces earnings that please the bulls, the short-sellers will rush to cover their positions, sparking a big rally. The gains can be so outsized that it only takes a few of these stocks in a year to ramp up portfolio returns significantly.

That said, let's not forget that stocks are heavily shorted for a reason. Use trading discipline and sound money management when playing earnings short-squeeze candidates. Sometimes the best play is to wait for the stock to break out. 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. But if you buy prior to the report, buy only if you have a very strong conviction that the stock is going to rip higher, and its acting extremely bullish technically.

  • Also see: 7 Smaller Stocks Beating the Big Guys
  • Here's a look at a number of stocks that could experience big short squeezes when they report earnings this week.

    Sigma Designs

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    My first earnings short-squeeze idea is semiconductor player Sigma Designs ( SIGM), which is set to report its numbers on Wednesday after the close. This is a fabless provider of system-on-chip solutions used to deliver multimedia entertainment throughout the home. Wall Street analysts, on average, expect Sigma Designs to report revenue of $42.93 million on a loss of 23 cents per share.

    If you're looking for a beaten-down stock heading into earnings, then Sigma Designs is one name you should take a hard look at. This stock has plunged in just the last couple of weeks from its November high of $8.64 to a recent low of $6.58. This notable drop has pushed the stock into oversold territory since its current relative strength index reading is 33.28.

    The current short interest as a percentage of the float for Sigma Designs is 6.9%. That means that out of the 28.99 million shares in the tradable float, 2.15 million shares are sold short by the bears. This stock has a very low tradable float and a reasonable short-interest. Any bullish earnings news should set this stock up for a large short-squeeze off of oversold levels.

    From a technical standpoint, this stock is currently trading below both its 50-day and 200-day moving averages, which is bearish. The stock plunged in just the last month after hitting some big overhead resistance at $8.60 a share. Shares of SIGM have started to rebound just a bit off the recent low of $6.58, with shares trading around $6.81.

    If you're bullish on this stock, I would look to get long after they report their results providing the stock trades back above some near-term overhead resistance at $6.91 on high-volume. Look for volume that's tracking in close to or above its three-month average of 214,880 shares. If we get that high-volume move, then look for the bulls to spike this stock back toward its 50-day moving average of $7.97 a share, or possibly even higher.

    I would only get short or avoid any long trade on SIGM after they have released their results if the stock drops below that near-term support at $6.58 a share on heavy volume. A high-volume drop below that level should set this stock up for a 10% to 20% drop post-earnings.

    Magma Design Automation

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    Another potential earnings short-squeeze play is Magma Design Automation ( LAVA), which is set to report results on Thursday after the market close. This company is a provider of electronic design automation software products and related services. Wall Street analysts, on average, expect Magma Design Automation to report revenue of $37.83 million on earnings of 8 cents per share.

    For the past three quarters, Magma's results have come in below Wall Street expectations. Last quarter, the company reported net income of 4 cents a share vs. an estimated profit of 7 cents per share. Revenue has trended higher for Magma for the past four quarters. The company's loss last quarter followed profits in the previous two quarters.

    The current short interest as a percentage of the float for Magma Design Automation is notable at 5.1%. That means that out of the 63.16 million shares in the tradable float, 3.23 million shares are sold short by the bears. This isn't a huge short-interest, but it's high enough to spark a short-squeeze if LAVA can report a decent quarter and raise guidance.

    From a technical standpoint, this stock is currently trading well below its 200-day moving average and above its 50-day moving average, which is neutral trendwise. This stock recently formed a double bottom at around $4 a share, and since then it has trend higher toward its current price of $5.50 a share. The stock now sets up for a big breakout post-earnings if they can deliver a solid quarter.

    If you're bullish on this stock, I would wait until after they report their results and buy the stock once it breaks out above $5.90 and $6.22 (200-day) on high-volume. Look for volume that's tracking in close to or above its three-month average action of 799,475 shares. If we get that high-volume breakout, then look for this stock to make a run at $8 a share.

    I would avoid any long trades, or I would get short this stock after earnings, if shares drop below its 50-day moving average of $5.07 on heavy volume. I would target a drop back toward $4 a share or possibly even lower if that 50-day is taken out post-earnings.

    Jos. A. Bank Clothiers

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    One earnings short-squeeze play in the retail apparel complex is Jos. A. Bank Clothiers ( JOSB), which is set to release numbers on Tuesday before the market open. This company is a designer, manufacturer, retailer and direct marketer of men's tailored and casual clothing and accessories. Wall Street analysts, on average, expect Jos. A. Bank Clothiers to report revenue of $196.03 million on earnings of 51 cents per share.

    During the last quarter, this company topped Wall Street estimates of 68 cents per share, after they reported a profit of 74 cents per share. They missed estimate in the previous quarter, and in the first quarter, they missed Wall Street forecasts by 2 cents. This company has seen net income trend higher in three straight quarters. Revenue has also trended higher for the past four quarters.

    The current short interest as a percentage of the float for Jos. A. Bank Clothiers is very high at 15.3%. That means that out of the 27.48 million shares in the tradable float, 4.21 million are sold short by the bears. This stock has a low float and a very high short-interest. If the bulls get what they're looking for, then I expect this stock to spike significantly higher as bears cover some of their short bets.

    From a technical standpoint, this stock is currently trading below its 50-day moving average and above its 200-day moving average, which is neutral trendwise. This stock formed a double bottom in August at around $40.50 a share, and has since climbed to a recent high of $56.43 a share. Since hitting that high, shares have dropped back to its current price of around $51 a share.

    The way I would play this name is to wait until after they report their earnings and buy the stock if it trades back above its 50-day at $51.20 on high-volume. Look for volume that's tracking in close to or above its three-month average action of 312,681 shares. If we get that move, I would look for this stock to pop 10% or more and possibly take out its near-term high of $56.43.

    I would only consider shorting this stock after earnings if it drops below its 200-day moving average of $49.82 on heavy volume. If that level is taken out, I would then add to any short position once it drops below $47.50 with volume. If those levels are taken out, I would target a drop back toward $44, or possibly even lower if the bears lean on this stock post-earnings.

    Ulta Salon, Cosmetics & Fragrance

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    One earnings short-squeeze play in specialty retail complex is Ulta Salon, Cosmetics & Fragrance ( ULTA), which is set to release numbers on Thursday after the market close.

    Wall Street analysts, on average, expect Ulta Salon, Cosmetics & Fragrance to report revenue of $406.05 million on earnings of 38 cents per share.

    During the last quarter, this company beat Wall Street estimates by 6 cents, after they reported a profit of 38 cents per share vs. estimates of net income of 32 cents per share. That solid quarter registered the fourth straight quarter that ULTA has beaten Wall Street estimates.

    This company has registered double-digit year-over-year percentage revenue growth for the past four quarters. Over that timeframe, ULTA has averaged growth of 20.5%. Net income has trended higher over the past three quarters. Net income exploded 70.5% in the first quarter and 48.8% in the fourth quarter of last year.

    The current short interest as a percentage of the float for ULTA stands at 4.1%. That means that out of the 47.09 million shares in the tradable float, 1.91 million are sold short by the bears. The bears have also been increasing their bets from the last reporting period by 4.5%, or by about 82,124 shares. If the short-sellers are caught leaning too hard into this quarter, then we have a solid chance to see a big short-squeeze.

    From a technical standpoint, this stock is currently trading above both its 50-day and 200-day moving averages, which is bullish. This stock bottomed in August at $48.28 and has been trending up since then printing mostly higher lows and higher highs. For the past two months, this stock has been trending sideways between $58.71 and $75.69 a share. A move outside of this range should set this stock up for its next big trend.

    If you're bullish on this stock, wait until after they report and buy the stock if manages to hold above its 50-day moving average of $68.53. If this stock holds above that 50-day, I would then want to get long and anticipate a post-earnings breakout above $75.69. Look for a breakout on volume that's tracking in close to or well above its three-month average action of 992,986 shares.

    I would only look to short this stock after earnings if it fails to hold above that 50-day and then drops below some near-term support at $64 a share. I would target a drop in this stock back toward its 200-day moving average of $58.18, or possibly lower if the bears smack this stock down post-earnings.

    Zumiez

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    My final earnings short-squeeze candidate is specialty retail player Zumiez ( ZUMZ), which is set to release numbers on Thursday after the market close. This is a mall-based specialty retailer of action sports related apparel, footwear, equipment and accessories. Wall Street analysts, on average, expect Zumiez to report revenue of $153.06 million on earnings of 42 cents per share.

    This company has topped Wall Street estimates for the past four quarters and is coming off a quarter where they beat by 3 cents, after reporting net income of 8 cents per shares vs. the average estimate of 5 cents per share. Zumiez has registered double-digit year-over-year percentage revenue growth for the past four quarters. Over that timeframe, the company has averaged growth of 17.9%.

    The current short interest as a percentage of the float for Zumiez is rather large at 24.7%. That means that out of the 21.78 million shares in the tradable float, 5.39 million shares are sold short by the bears. This is an extremely high short-interest, so if we get a bullish earnings report and solid guidance, look for this stock to soar post-earnings.

    From a technical standpoint, this stock is currently trading above its 50-day moving average and below its 200-day moving average, which is neutral trendwise. This stock recently found some big buying support at around $16.50 to $16 a share, before it ran up to its current price of $22 a share. For the past two months, this stock has been trading sideways between $20 and $25 a share. A move out of that range will likely setup ZUMZ for its next big trend.

    If you're bullish on this stock, I would wait until after they report earnings and buy some shares if it breaks out above $23.98 (200-day) and $24.79 on big volume. Look for volume that's tracking in close to or above its three-month average action of 465,859 shares. If we get that high-volume breakout, then look for ZUMZ to trade back towards its July high of $29.50.

    I would only get short this stock after earnings if it trades back below both its 50-day ($21.25) and $20 a share on high-volume. I would target a drop back toward some previous support zones near $17 to $16 a share if the bears hammer this lower post-earnings.

    To see more potential earnings short squeeze plays like OmniVision Technologies (OVTI), Zoltek (ZOLT) and Lululemon Athletica (LULU), check out the Earnings Short Squeeze Plays portfolio on Stockpickr.

    -- Written by Roberto Pedone in Winderemere, Fla.

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    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 Web site 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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