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. 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.
United Natural FoodsA potential earnings short-squeeze trade is food processing player United Natural Foods ( UNFI), which is set to report results on Tuesday before the market open. This company is a distributor of natural, organic and specialty foods and non-food products in the U.S. and Canada. Wall Street analysts, on average, expect United Natural Foods to report revenues of $1.35 billion on earnings of 56 cents per share. On Friday, Barclays said it maintains an equalweight on United Natural Foods with a price target of $40. The firm said its keeping its equalweight rating on the stock, due to strong revenue growth as opposed to strong EPS growth. To put it in simple terms, sales have gone up, but gross margins have gone down. The firm also said the new warehouse management system is a positive, but may take years to implement and payoff. The current short interest as a percentage of the float for United Natural Foods is notable at 5%. That means that out of the 46.47 million shares in the tradable float, 2.33 million shares are sold short by the bears. The bears have also been increasing their bets from the last reporting period by 7.3%, or by about 158,000 shares. From a technical perspective, UNFI 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 soaring from a low of $35.85 to a recent high of $51.92 a share. Now the stock has started to trend sideways for the past month or so, between $51.92 and $48 a share. A move outside of that range post-earnings should setup the next major trend for UNFI. If you're bullish on UNFI, I would wait until after they release earnings. Look for long-biased trades if this stock can manage to trigger a break out above some near-term overhead resistance at $51.39 to $51.92 a share with high-volume. Look for volume on that move that's close to or above its three-month average action of 254,390 shares. If we get that action, then UNFI will be trading at a new 52-week high, and the stock could easily trend towards $60 a share. I would simply avoid UNFI or look for short-biased trades if after earnings it fails to trigger that breakout, and then drops below some near-term support at $48 to $47 a share with high-volume. If we get that action, then UNFI could trend lower toward $45 to $44 a share or possibly down to its 200-day moving average of $42.31 a share.
G-III Apparel GroupMy first earnings short-squeeze candidate is apparel player G-III Apparel Group ( GIII), which is set to release its numbers on Tuesday before the market open. This company designs, manufactures and markets women's and men's apparel primarily in the U.S. Wall Street analysts, on average, expect G-III Apparel Group to report revenue of $213.39 million on a loss of 4 cents per share. The current short interest as a percentage of the float for G-III Apparel Group is rather high at 13.1%. That means that out of the 15.95 million shares in the tradable float, 2.09 million shares are sold short by the bears. This is a high short-interest on a stock with a very low float. If G-III Apparel Group can deliver what the bulls are looking for, then this stock could experience a sizable short-squeeze post-earnings. From a technical perspective, GIII is currently trading below both its 50-day and 200-day moving averages, which is bearish. This stock has been downtrending for the last two months, with shares falling from a high of $29.62 to a recent low of $23.28 a share. During that downtrend, shares of GIII have mostly made lower highs and lower lows, which is bearish technical price action. If you're in the bull camp on GIII, I would wait until after they report. Look for long-biased trades if this stock can manage to move back above its 200-day moving average of $24.78 a share with high-volume. Look for volume on that move that hits near or above its three-month average action of 218,078 shares. If we get that action, then add to any long positions once GIII takes out some near-term overhead resistance at $25.48 and then it 50-day moving average of $26.49 a share. I would simply avoid GIII or look for short-biased trades if after earnings this stock fails to trade back above its 200-day at $24.78, and then drops below some near-term support at $23.28 a share with heavy volume. If we get that move, then look for GIII to trend down toward $21.21 a share or much lower if the bears hammer this stock post-earnings.
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