By Rebecca Lipman, Kapitall Editor When short sellers "cover" their position on a stock they signal optimism, meaning they believe the stock has more upside (price increase) than downside ahead. This information is valuable all year long, but it is especially interesting around earnings season. (Related List: Warning: 6 Stocks Reporting Earnings This Week With History of Disappointment) When stocks report earnings they have the chance to surprise investors, in a good way or bad, by presenting numbers that either beat or fall below expectations. This is known as an "earnings surprise" and it has the potential to cause significant shifts in stock prices. We had an idea: Let's take a look at stocks reporting earnings this week (February 26-29) with two bullish signals: 1) Significant short covering - shares shorted have decreased month over month. Again, this is a sign that short sellers, who benefit when share prices fall, think these stocks will increase in value 2) A history of positive earning surprises - We looked for stocks that have reported at least an average 5% above estimated EPS over the past 5 quarters. Past performance is no guarantee of the future, but this might imply the market is continually undervaluing these stocks. We were left with 4 names. What do you think is in store for these names? Use this as a starting point for your own analysis. List Average 1-Year Return: -11% 1. BroadSoft, Inc. ( BSFT): Provides software that enables fixed-line, mobile, and cable service providers to deliver voice and multimedia services over Internet protocol (IP) based networks. Market cap at $913.5M, most recent closing price at $33.11. Shares shorted have decreased from 4.42M to 3.97M over the last month, a decrease which represents about 1.64% of the company's float of 27.48M shares. Days to cover ratio at 9.4 days.
In Dec 2011: Reported EPS at 0.38 vs. estimate at 0.28 (surprise of 35.7%). In Mar 2012: Reported EPS at 0.29 vs. estimate at 0.23 (surprise of 26.1%). In Jun 2012: Reported EPS at 0.33 vs. estimate at 0.21 (surprise of 57.1%). In Sep 2012: Reported 0.35 vs. estimate at 0.32 (surprise of 9.4%. [Average earnings surprise at 32.08%].Reporting Feb 27 2. Questcor Pharmaceuticals, Inc. ( QCOR): Provides prescription drugs for central nervous system and inflammatory disorders. Market cap at $1.81B, most recent closing price at $30.90. Shares shorted have decreased from 27.58M to 25.93M over the last month, a decrease which represents about 3.32% of the company's float of 49.77M shares. Days to cover ratio at 16.1 days. In Dec 2011: Reported EPS at 0.47 vs. estimate at 0.42 (surprise of 11.9%). In Mar 2012: Reported EPS at 0.61 vs. estimate at 0.52 (surprise of 17.3%). In Jun 2012: Reported EPS at 0.69 vs. estimate at 0.64 (surprise of 7.8%). In Sep 2012: Reported 0.97 vs. estimate at 0.77 (surprise of 26%. [Average earnings surprise at 15.75%]. Reporting Feb 26
3. Sturm, Ruger & Co. Inc. ( RGR): Engages in the design, manufacture, and sale of firearms in the United States. Market cap at $1.03B, most recent closing price at $53.67. Shares shorted have decreased from 7.35M to 6.82M over the last month, a decrease which represents about 2.86% of the company's float of 18.52M shares. Days to cover ratio at 9.74 days. In Mar 2012: Reported EPS at 0.79 vs. estimate at 0.68 (surprise of 16.2%). In Jun 2012: Reported EPS at 0.91 vs. estimate at 0.8 (surprise of 13.7%). In Sep 2012: Reported EPS at 0.88 vs. estimate at 0.8 (surprise of 10%). In Dec 2012: Reported 0.88 vs. estimate at 0.67 (surprise of 31.3%. [Average earnings surprise at 17.8%].
Reporting Feb 27
List compiled by Kapitall's Rebecca Lipman