5 Short-Squeeze Stocks Set to Soar on Bullish Earnings

 

DELAFIELD, Wis. (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 time frame 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.

Of course, sometimes the stock is going to be in such high demand that you risk missing a lot of the move by waiting. That's why it can be worth betting prior to the report -- but only if the stock is acting technically very bullish and you have a very strong conviction that it is going to rip higher. Just remember that even when you have that conviction and have done your due diligence, the stock can still get hammered if Wall Street doesn't like the numbers or guidance.

If you do decide to bet ahead of a quarter, then you might want to use options to limit your capital exposure. Heavily shorted stocks are usually the names that make the biggest post-earnings moves and have the most volatility. I personally prefer to wait until all the earnings-related news is out for a heavily shorted stock and then jump in and trade the prevailing trend.

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

KH Home

My first earnings short-squeeze play is homebuilding player KB Home (KBH) , which is set to release numbers on Wednesday before the market open. Wall Street analysts, on average, expect KB Home to report revenue of $646.76 million on earnings of 40 cents per share.

The current short interest as a percentage of the float for KB Home is extremely high at 21.2%. That means that out of the 80.51 million shares in the tradable float, 17.13 million shares are sold short by the bears. The bears have also been increasing their bets from the last reporting period by 2.7%, or by 454,000 shares. If the bears get caught pressing their bets into a bullish quarter, then shares of KBH could easily rip sharply higher post-earnings as the shorts jump to cover some of their trades.

From a technical perspective, KBH is currently trending just below both its 50-day and 200-day moving averages, which is bearish. This stock has been trending sideways over the last month and change, with shares moving between $16.06 on the downside and $17.94 on the upside. Any high-volume move above the upper-end of its recent range post-earnings could trigger a near-term breakout trade for shares of KBH.

If you're bullish on KBH, then I would wait until after its report and look for long-biased trades if this stock manages to break out above some near-term overhead resistance levels at $17.60 to $17.94 a share with high volume. Look for volume on that move that hits near or above its three-month average action of 3.16 million shares. If that breakout starts post-earnings, then KBH will set up to re-test or possibly take out its next major overhead resistance levels at $18.47 to $18.96 a share, or even $19.38 to its 52-week high at $20.78 a share.

I would simply avoid KBH or look for short-biased trades if after earnings it fails to trigger that breakout and then drops back below some key near-term support levels at $16.66 to $16.06 a share with high volume. If we get that move, then KBH will set up to re-test or possibly take out its next major support level at its 52-week low of $15.40 a share.

CarMax

Another potential earnings short-squeeze trade idea is used car retailer CarMax (KMX) , which is set to release its numbers on Tuesday before the market open. Wall Street analysts, on average, expect CarMax to report revenue $3.57 billion on earnings of 67 cents per share.

The current short interest as a percentage of the float for CarMax is notable at 6.1%. That means that out of the 218 million shares in the tradable float, 13.48 million shares are sold short by the bears. The bears have also been increasing their bets from the last reporting period by 2.2%, or by 289,000 shares. If the bears get caught pressing their bets into a strong quarter, then shares of KMX could easily jump sharply higher post-earnings as the shorts rush to cover some of their positions.

From a technical perspective, KMX is currently trending above both its 50-day and 200-day moving averages, which is bullish. This stock has been uptrending for the last month and change, with shares moving higher from its low of $46.64 to its recent high of $54.28 a share. During that uptrend, shares of KMX have been making mostly higher lows and higher highs, which is bullish technical price action. That move has now pushed shares of KMX within range of triggering a big breakout trade post-earnings.

If you're in the bull camp on KMX, then I would wait until after its report and look for long-biased trades if this stock manages to break out above some near-term overhead resistance levels at $54.01 to its 52-week high of $54.28 a share with high volume. Look for volume on that move that registers near or above its three-month average volume of 1.52 million shares. If that breakout develops post-earnings, then KMX will set up to enter new 52-week-high territory, which is bullish technical price action. Some possible upside targets off that breakout are $60 to $65 a share, or even $70 a share.

I would simply avoid KMX or look for short-biased trades if after earnings it fails to trigger that breakout and then drops back below its 50-day moving average of $51.47 a share and then below more near-term support at $51 a share with high volume. If we get that move, then KMX will set up to re-test or possibly take out its next major support levels at $48.64 to its 200-day moving average of $48.02 a share. Any high-volume move below those level will then give KMX a chance to re-fill some of its previous gap-up-day zone from June that started just above $45 a share.

Bed Bath & Beyond

Another potential earnings short-squeeze candidate is home furnishing retail chain store operator Bed Bath & Beyond (BBBY) , which is set to release numbers on Tuesday after the market close. Wall Street analysts, on average, expect Bed Bath & Beyond to report revenue of $2.89 billion on earnings of $1.14 per share.

The current short interest as a percentage of the float for Bed Bath & Beyond is pretty high at 12.4%. That means that out of the 192.23 million shares in the tradable float, 23.90 million shares are sold short by the bears. If the bulls can get the earnings news they're looking for, then shares of BBBY could easily rip sharply higher post-earnings as the bears move fast to cover some of their short positions.

From a technical perspective, BBBY is currently trending above its 50-day moving average and just below its 200-day moving average, which is neutral trendwise. This stock has been uptrending strong for the last two month and change, with shares moving higher from its low of $54.96 to its recent high of $66 a share. During that uptrend, shares of BBBY have been consistently making higher lows and higher highs, which is bullish technical price action. That strong move has now pushed shares of BBBY within range of triggering a big breakout trade post-earnings.

If you're bullish on BBBY, then I would wait until after its report and look for long-biased trades if this stock manages to break out above its 200-day moving average of $65.47 a share and then above more near-term resistance at $66 a share with high volume. Look for volume on that move that hits near or above its three-month average action of 3.26 million shares. If that breakout kicks off post-earnings, then BBBY will set up to re-test or possibly take out its next major overhead resistance levels at $70.98 to $72 a share. Any high-volume move above $72 will then give BBBY a chance to re-fill some of its previous gap-down-day zone from January that started just above $80 a share.

I would avoid BBBY or look for short-biased trades if after earnings it fails to trigger that breakout and then drops back below some key near-term support levels at $63.48 a share to its 50-day moving average of $63.18 a share with high volume. If we get that move, then BBBY will set up to re-test or possibly take out its next major support levels at $61.03 to $57.87 a share, or even its 52-week low of $54.96 a share.

Paychex

Another earnings short-squeeze prospect is staffing and outsourcing services player Paychex (PAYX) , which is set to release numbers on Wednesday before the market open. Wall Street analysts, on average, expect Paychex to report revenue of $662.62 million on earnings of 46 cents per share.

The current short interest as a percentage of the float for Paychex is notable at 5.4%. That means that out of the 324.52 million shares in the tradable float, 17.83 million shares are sold short by the bears. The bears have also been increasing their bets from the last reporting period by 1.9%, or by 339,000 shares. If the bears get caught pressing their bets into a strong quarter, then shares of PAYX could easily trend sharply higher post-earnings as the shorts rush to cover some of their positions.

From a technical perspective, PAYX is currently trending above both its 50-day and 200-day moving averages, which is bullish. This stock has been uptrending over the last four months and change, with shares moving higher from its low of $39.09 to its recent high of $41.17 a share. During that uptrend, shares of PAYX have been making mostly higher lows and higher highs, which is bullish technical price action. That move has now pushed shares of PAYX within range of triggering a big breakout trade post-earnings above some key overhead resistance levels.

If you're bullish on PAYX, then I would wait until after its report and look for long-biased trades if this stock manages to break out above some near-term overhead resistance levels at $43.17 to $44.76 a s share and then above its 52-week high at $45.95 a share with high volume. Look for volume on that move that hits near or above its three-month average action of 1.83 million shares. If that breakout gets underway post-earnings, then PAYX will set up to enter new 52-week-high territory above $45.95, which is bullish technical price action. Some possible upside targets off that breakout are $50 to $55 a share, or even $60 a share.

I would simply avoid PAYX or look for short-biased trades if after earnings it fails to trigger that breakout and then takes out its 50-day moving average of $41.80 a share to its 200-day moving average of $41.44 a share with high volume. If we get that move, then PAYX will set up to re-test or possibly take out its next major support levels at $40.10 to its 52-week low of $39.21 a share.

AAR

My final earnings short-squeeze play is diversified commercial aviation products and services provider AAR (AIR) , which is set to release numbers on Tuesday after the market close. Wall Street analysts, on average, expect AAR Corp. to report revenue of $489.53 million on earnings of 38 cents per share.

The current short interest as a percentage of the float for AAR Corp. is notable at 6.8%. That means that out of the 36.45 million shares in the tradable float, 2.5 million shares are sold short by the bears. This is a decent short interest on a stock with a low tradable float. Any bullish earnings could easily spark a tradable short-covering rally for shares of AIR post-earnings as the bears rush to cover some of their positions.

From a technical perspective, AIR is currently trending above both its 50-day and 200-day moving averages, which is bullish. This stock has been uptrending over the last three months and change, with shares moving higher from its low of $23.68 to its recent high of $29.05 a share. During that uptrend, shares of AIR have been making mostly higher lows and higher highs, which is bullish technical price action. That move has now pushed shares of AIR within range of triggering a big breakout trade post-earnings.

If you're in the bull camp on AIR, then I would wait until after its report and look for long-biased trades if this stock manages to break out above some near-term overhead resistance at $29.05 to $31.24 a share and then above its 52-week high at $31.55 a share with high volume. Look for volume on that move that registers near or above its three-month average action of 217,333 shares. If that breakout materializes post-earnings, then AIR will set up to enter new 52-week-high territory above $31.55, which is bullish technical price action. Some possible upside targets off that breakout are $40 to $45 a share.

I would avoid AIR or look for short-biased trades if after earnings it fails to trigger that breakout, and then drops back below both its 50-day at $27.38 and its 200-day at $27.14 a share with high volume. If we get that move, then AIR will set up to re-test or possibly take out its next major support levels at $25.47 to its 52-week low of $23.74 a share.

To see more potential earnings short squeeze plays, check out the Earnings Short-Squeeze Plays portfolio on Stockpickr.

-- Written by Roberto Pedone in Delafield, Wis.

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At the time of publication, author had no positions in stocks mentioned. Roberto Pedone, based out of Delafield, Wis., is an independent trader who focuses on technical analysis for small- and large-cap stocks, options, futures, commodities and currencies. Roberto studied international business at the Milwaukee School of Engineering, and he spent a year overseas studying business in Lubeck, Germany. His work has appeared on financial outlets including CNBC.com and Forbes.com. You can follow Pedone on Twitter at www.twitter.com/zerosum24 or @zerosum24.

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