5 Stocks Set to Soar on Bullish Earnings

WINDERMERE, Fla. (Stockpickr) -- Short-sellers hate being caught short a stock that reports a blowout quarter. 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.

>>5 Stocks Setting Up to Break Out

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 - buy only if you have a very strong conviction that the stock is going to rip higher, and its acting technically very bullish.

With that in mind, here's a look at several stocks that could experience big short squeezes when they report earnings this week.

Intuitive Surgical

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My first earnings short-squeeze trade idea is Intuitive Surgical ( ISRG), which is set to release its numbers on Tuesday after the market close. This company designs, manufactures and markets da Vinci Surgical Systems and related instruments and accessories. Wall Street analysts, on average, expect Intuitive Surgical to report revenues of $464.70 million on earnings of $3.14 per share.

This company reported a blowout number last quarter by topping Wall Street estimates by 41 cents per share, after reporting net income of $3.75 per share vs. an estimate of $3.34 per share. Intuitive Surgical has beaten Wall Street estimates for the last four quarters in a row. This company has averaged year-over-year revenue growth of 24.2% over the last four quarters.

The current short interest as a percentage of the float for Intuitive Surgical sits at 2.5%. That means that out of the 38.89 million shares in the tradable float, 965,964 shares are sold short by the bears. This is not a stock with a huge short interest, but since the float is so small, it's more than enough to spark a decent short-squeeze post-earnings.

From a technical perspective, ISRG is currently trading above both its 50-day and 200-day moving averages, which is bullish. This stock has been uptrending strong for the past six months, with shares trending higher from a low of $408.16 a share to a recent high of $554.13 a share. This strong move has now pushed the stock within range of triggering a near-term breakout trade post-earnings.

If you like the look of ISRG here, I would wait until after its report and look for long-biased trades if this stock triggers a breakout above some near-term overhead resistance at $554.12 a share with high-volume. Look for volume on that move that registers close to or above its three-month average action of 322,816 shares. If we get that action, then look for ISRG to make a run at $560 to $580 a share or possibly higher.

I would simply avoid ISRG or look for short-biased trades if after earnings it fails to trigger that breakout, and then drops back below $528.30 to $522.39 (its 50-day) a share with heavy volume. Target a drop back toward $500 a share or possibly much lower of the bears whack this stock lower post-earnings.

Intuitive Surgical shows up on a list of Health Care Stocks Bought and Sold by Hedge Funds for the most recently reported quarter.

United Rentals

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An earnings short-squeeze candidate in the rental and leasing complex is equipment rental company United Rentals ( URI), which is set to report results on Tuesday after the market close. Wall Street analysts, on average, expect United Rentals to report revenue of $609.95 million on earnings of 5 cents per share.

If you're looking for a heavily shorted stock that's trending strong heading into its quarter, then take a look at shares of United Rentals. This stock has traded up over 30% so far in 2012, and shares are currently trading about 5 points off its 52-week high of $45.08 a share.

The current short interest as a percentage of the float for United Rentals is extremely high at 31.8%. That means that out of the 58.88 million shares in the tradable float, 20.01 million are sold short by the bears. The bears have also been increasing their bets from the last reporting period by 2.6%, or by about 513,900 shares.

From a technical perspective, URI is currently trading above its 200-day moving average and just below its 50-day moving average, which is neutral trendwise. This stock has been uptrending strong during the past six months, with shares moving higher from a low of $22.30 to a recent high of $45.08 a share. That said, this stock has run into some selling pressure during the last two months at around $44.12 to $45.08 a share, and it's recently dropped back below its 50-day moving average of $41.81 a share.

If you're bullish on URI, I would wait until after it reports earnings and look for long-biased trades if this stock can move back above its 50-day moving average of $41.81 a share with high volume. Look for volume on that move that registers near or well above its three-month average action of 2,065,480 shares. If we get that action, I would then add to any long positions if URI can break out above $45.08 with high volume.

I would simply avoid URI or look for short-biased trades if after earnings this stock fails to trigger that move back above its 50-day, and then drops below some near-term support at $37.80 a share with high-volume. If we get that move, then target a sizeable drop back towards $32 to $30 a share or possibly lower if the bears hammer this stock down post-earnings.

United Rentals shows up on lists of 10 Stocks Leading the Way in the Housing Recovery and 11 Rental Industry Stocks Riding a Rebound.

Cree

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Another potential earnings short-squeeze play in the semiconductors complex is Cree ( CREE), which is set to release numbers on Tuesday after the market close. This company develops and manufactures semiconductor materials and devices primarily based on silicon carbide, gallium nitride and related compounds. Wall Street analysts, on average, expect Cree to report revenues of $300.76 million on earnings of 21 cents per share.

During the last quarter, Cree missed Wall Street estimates by 2 cents, after reporting a net income of 15 cents per share versus a mean estimate of 18 cents per share. The company topped estimates during the first quarter. Cree has reported a profit for the last eight quarters, but income has dropped year-over-year by an average of 68.5% over the past four quarters. During the second quarter, profit plunged 75.7% to $12.1 million from $49.8 million the year earlier.

The current short interest as a percentage of the float for Cree is rather high at 15%. That means that out of the 112.92 million shares in the tradable float, 16.98 million are sold short by the bears. If Cree can manage to surprise the street with a solid quarter and bullish forward guidance, then the stock could see sizeable short-squeeze develop post-earnings.

From a technical perspective, CREE is currently trading above both its 50-day and 200-day moving averages, which is bullish. That said, the stock recently formed a potential triple top chart pattern. Shares of Cree have run into heavy selling resistance at $32.75, $32.61 and $32.70 a share in the past month. This demonstrates that the sellers are in control of this stock unless those levels are taken out with high-volume.

If you're a bull on CREE, I would wait until after its report and look for long-biased trades if this stock can manage to break out above $32.75 a share with high-volume. Look for volume on a move above that level that's near or well above its three-month average action of 3,310,910 shares. A high-volume move above $32.75 will negate the triple top and put this stock back into the control of the bulls. If we get that action, then target a run towards $35 to $37 a share or possibly much higher.

I would avoid CREE or look for short-biased trades if this stock fails to trigger that breakout above $32.75, and then moves below its 50-day moving average of $29.91 a share with high volume. If we get that action, then target a decent drop back below its 200-day moving average of $28.48 a share. The bears could potentially push this lower towards $26 to $24 a share post-earnings.

Cree shows up on a recent list of 15 Apple-Like Stocks That Could Bear Similar Fruit.

USG

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An earnings short-squeeze play in the construction and raw materials complex is USG ( USG), which is set to release numbers on Tuesday before the market open. This company, through its subsidiaries, is a manufacturer and distributor of building materials. Wall Street analysts, on average, expect USG to report revenues of $807.22 million on a loss of 42 cents per share.

If you're looking for a heavily-shorted stock that's trending very strong heading into its quarter, then take a strong look at shares of USG. This stock has been on fire so far in 2012 with shares trading up over 65%. This stock is currently trading just a few points off its 52-week high of $19.44 a share.

The current short interest as a percentage of the float for USG is extremely high at 24.8%. That means that out of the 72.49 million shares in the tradable float, 22.13 million are sold short by the bears. This stock has a very high short-interest, so any bullish earnings news and forward guidance could easily spark a massive short-squeeze.

From a technical perspective, USG is currently trading above both its 50-day and 200-day moving averages, which is bullish. This stock has been trending strong for the past six months, moving from a low of $7.65 to a recent high of $19.44 a share. During that uptrend, shares of USG have consistently made higher lows and higher highs, which is bullish price action. That move has pushed the stock within range of triggering a near-term breakout trade post-earnings.

If you're a bull on USG, then I would consider long biased trades after its report if this stock can manage to trigger a breakout above some near-term overhead resistance at $17.41 to $19.91 a share with high volume. Look for volume on a move above those levels that's near or well above its three-month average action of 3.55 million shares. If we get that action, then USG could start to make a run at its 2010 high of $25.59 a share.

I would simply avoid USG or look for short-biased trades if the stock fails to trigger that breakout, and then drops back below some near-term support at $15.11 a share with heavy volume. If we get that action, then look for USG to drop back towards its next significant previous support levels at $13 to $12 a share or possibly lower.

USG, one of Warren Buffett's holdings, shows up on a list of 10 Stocks Leading the Way in the Housing Recovery.

Mcmoran Exploration

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My final earnings short-squeeze trade idea today is Mcmoran Exploration ( MMR), which is set to release numbers on Tuesday before the market open. This company engages in the exploration, development, and production of oil and natural gas in the shallow waters of the Gulf of Mexico and onshore in the Gulf Coast area of the U.S. Wall Street analysts, on average, expect Mcmoran Exploration to report revenues of $109.39 million on a loss of 10 cents per share.

If you're looking for a beaten-down heavily-shorted stock ahead of its earnings, then make sure to check out shares of Mcmoran Exploration. This stock has plunged over 35% so far in 2012. The current short interest as a percentage of the float for Mcmoran Exploration is very high at 18.3%. That means that out of the 96.54 million shares in the tradable float, 18.49 million shares are sold short by the bears. This stock has a ton of shorts involved, so any bullish news could easily send MMR shares skyrocketing higher post-earnings.

From a technical perspective, MMR is currently trading below both its 50-day and 200-day moving averages, which is bearish. This stock has dropped from its yearly high of $15.24 to a recent low of $8.70 a share. That massive move lower has pushed MMR into oversold territory, since its current relative strength index is 22.49. Oversold can always get more oversold, but if we see strength post-earnings then MMR could bounce huge from current levels.

If you're bullish on MMR, I would wait until after it reports earnings and look for long-biased trades if this stock can hold above its recent lows of $8.70 to $8.25 a share. If those levels hold, then look for a high-volume move over $9.50 a share to signal that MMR wants to trend higher. Look for volume on that move that's near or well above its three-month average action of 2,994,430 shares. If we get that action, target a possible bounce back towards its 50-day moving average of $12.60 a share.

I would simply avoid MMR or look for short biased trades post-earnings if this stock takes out those previous support levels at $8.70 to $8.25 a share with high-volume. If those levels are taken out with volume post-earnings, then MMR could easily drop towards $7 to $6 a share or possibly lower.

As of the most recently reported quarter, MMR was one of the top holdings in T.Boone Pickens' BP Capital portfolio.

To see more potential earnings short squeeze plays, 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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