5 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.

Actuant

My first earnings short-squeeze play is industrial products and systems designer and manufacturer Actuant (ATU) , which is set to release numbers on Wednesday before the market open. Wall Street analysts, on average, expect Actuant to report revenue of $357.47 million on 52 cents per share.

The current short interest as a percentage of the float for Actuant stands at 4.4%. That means that out of the 63.55 million shares in the tradable float, 2.79 million shares are sold short by the bears. The bears have also been increasing their bets from the last reporting period by 16.5%, or by 395,000 shares. If the bears get caught pressing their bets into a strong quarter, then shares of ATU could easily trend sharply higher post-earnings as the shorts move to cover some of their positions.

From a technical perspective, ATU is currently trending below both its 50-day and 200-day moving averages, which is bearish. This stock has been downtrending for the last month and change, with shares moving lower from its high of $34.46 to its recent low of $31.05 a share. During that downtrend, shares of ATU have been consistently making lower highs and lower lows, which is bearish technical price action.

If you're bullish on ATU, then I would wait until after its report and look for long-biased trades if this stock manages to break out above some key near-term overhead resistance levels at $32 to its 50-day moving average of $32.91 a share with high volume. Look for volume on that move that hits near or above its three-month average action of 500,048 shares. If that breakout triggers post-earnings, then ATU will set up to re-test or possibly takeout its next major overhead resistance levels at its 200-day moving average of $34.23 to $35 a share, or even $37 to $39 a share.

I would simply avoid ATU or look for short-biased trades if after earnings it fails to trigger that breakout and then drops back below its 52-week low of $31.05 a share with high volume. If we get that move, then ATU will set up to enter new 52-week-low territory, which is bearish technical price action. Some possible downside targets off that move are $26 to $25 a share.

Constellation Brands

Another potential earnings short-squeeze trade idea is beer, wine and spirits producer and marketer Constellation Brands (STZ) , which is set to release its numbers on Thursday before the market open. Wall Street analysts, on average, expect Constellation Brands to report revenue $1.64 billion on earnings of $1.15 per share.

The current short interest as a percentage of the float for Constellation Brands sits at 1.4%. That means that out of the 159.92 million shares in the tradable float, 2.23 million shares are sold short by the bears. This isn't a huge short interest, but it's more than enough to spark a decent short-covering rally post-earnings of Constellation Brands can deliver the earnings news the bulls are looking for.

From a technical perspective, STZ is currently trending above both its 50-day and 200-day moving averages, which is bullish. This stock has been trending sideways and consolidating for the last month and change, with shares moving between $84.80 on the downside and $88.50 on the upside. Any high-volume move above the upper-end of that range post-earnings could trigger a big breakout trade for shares of STZ.

If you're in the bull camp on STZ, 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 $88.43 to $88.50 a share with high volume. Look for volume on that move that hits near or above its three-month average volume of 1.04 million shares. If that breakout begins post-earnings, then STZ will set up to re-test or possibly take out its next major overhead resistance level at its 52-week high of $94.77 a share.

I would simply avoid STZ 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 $84.80 a share to its 200-day moving average of $82.27 a share with high volume. If we get that move, then STZ will set up to re-test or possibly take out its next major support levels at $78 to $76 a share.

McCormick

Another potential earnings short-squeeze candidate is processed and packaged goods player McCormick (MKC) , which is set to release numbers on Thursday before the market open. Wall Street analysts, on average, expect McCormick & Company to report revenue of $1.03 billion on earnings of 81 cents per share.

The current short interest as a percentage of the float for McCormick & Company is notable at 4.9%. That means that out of the 125.45 million shares in the tradable float, 5.69 million shares are sold short by the bears. The bears have also been increasing their bets from the last reporting period by 1.4%, or by 81,000 shares. If the bears get caught pressing their bets into a bullish quarter, then shares of MKC could jump sharply higher post-earnings as the bears rush to cover some of their positions.

From a technical perspective, MKC is currently trending below both its 50-day and 200-day moving averages, which is bearish. This stock has been downtrending for the last month and change, with shares moving lower from its high of $70.25 to its recent low of $65.80 a share. During that downtrend, shares of MKC have been consistently making lower highs and lower lows, which is bearish technical price action. That said, shares of MKC have now started to rebound off that $65.80 and it's starting to move within range of triggering a near-term breakout trade post-earnings.

If you're bullish on MKC, then I would wait until after its report and look for long-biased trades if this stock manages to break out above its 50-day moving average of $68.35 a share to its 200-day moving average of $68.75 a share with high volume. Look for volume on that move that registers near or above its three-month average action of 490,164 shares. If that breakout gets underway post-earnings, then MKC will set up to re-test or possibly take out its next major overhead resistance levels at $70.25 to $71.71 a share, or even $72.61 to its 52-week high of $73.33 a share. Any high-volume move above its 52-week high will give MKC a chance to make a run at $80 a share.

I would avoid MKC 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 $65.80 to $64.92 a share with high volume. If we get that move, then MKC will set up to re-test or possibly take out its next major support level at $62.10 to $60 a share.

Global Payments

Another earnings short-squeeze prospect is electronic payments transaction process services player Global Payments (GPN) , which is set to release numbers on Thursday before the market open. Wall Street analysts, on average, expect Global Payments to report revenue of $675.66 million on earnings of $1.14 per share.

The current short interest as a percentage of the float for Global Payments stands at 2.1%. That means that out of the 67.08 million shares in the tradable float, 1.46 million shares are sold short by the bears. The bears have also been increasing their bets from the last reporting period by 26%, or by 302,000 shares. If the bears get caught pressing their bets into a bullish quarter, then shares of GPN could easily jump sharply higher post-earnings as the shorts move to cover some of their trades.

From a technical perspective, GPN is currently trending above its 200-day moving average and just below its 50-day moving average, which is neutral trendwise. This stock has just started to bounce higher right off its 200-day moving average of $69.30 a share. That bounce is starting to push shares of GPN within range of triggering a major breakout trade post-earnings.

If you're bullish on GPN, then I would wait until after its report and look for long-biased trades if this stock manages to break out above its 50-day moving average of $71.06 a share and then once it clears more resistance levels at $73.78 to $74.19 a share plus its 52-week high at $74.46 a share with high volume. Look for volume on that move that hits near or above its three-month average action of 555,927 shares. If that breakout develops post-earnings, then GPN will set up to enter new 52-week-high territory above $74.46, which is bullish technical price action. Some possible upside targets off that breakout are $80 to $85 a share.

I would simply avoid GPN or look for short-biased trades if after earnings it fails to trigger that breakout and then takes out some key near-term support levels at $68.73 to $67.32 a share with high volume. If we get that move, then GPN will set up to re-test or possibly take out its next major support levels at $64.62 to $63.08 a share, or even $60 a share.

Resources Connection

My final earnings short-squeeze play is consulting and business initiative support services provider Resources Connection (RECN) , which is set to release numbers on Thursday after the market close. Wall Street analysts, on average, expect Resources Connection to report revenue of $140.54 million on earnings of 13 cents per share.

The current short interest as a percentage of the float for Resources Connection sits at 1.9%. That means that out of the 36.73 million shares in the tradable float, 689,900 shares are sold short by the bears. The bears have also been increasing their bets from the last reporting period by 8%, or by 51,000 shares. If the bears get caught pressing their bets into a strong quarter, then shares of RECN could easily move sharply higher post-earnings as the shorts rush to cover some of their bets.

From a technical perspective, RECN is currently trending above its 200-day moving average and just below its 50-day moving average, which is neutral trendwise. This stock has been downtrending a bit over the last month, with shares moving lower from its high of $15.92 to its recent low of $14.04 a share. During that move, shares of RECN have been consistently making lower highs and lower lows, which is bearish technical price action. That said, shares of RECN have now started to rebound off that $14.04 low and it's quickly moving within range of triggering a near-term breakout trade post-earnings.

If you're in the bull camp on RECN, then I would wait until after its report and look for long-biased trades if this stock manages to break out above its 50-day moving average of $15.05 a share to its 52-week high at $15.98 a share with high volume. Look for volume on that move that registers near or above its three-month average action of 120,106 shares. If that breakout develops post-earnings, then RECN will set up to enter new 52-week-high territory above $15.98, which is bullish technical price action. Some possible upside targets off that breakout are $18 to $20 a share.

I would avoid RECN or look for short-biased trades if after earnings it fails to trigger that breakout, and then drops back below its 200-day moving average of $13.82 a share with high volume. If we get that move, then RECN will set up to re-test or possibly take out its next major support levels at $12.80 to $12 a share, or even $11.80 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.

RELATED LINKS:

 

 

 

Follow Stockpickr on Twitter and become a fan on Facebook.

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.

More from Investing

Asian Markets Decline in Morning Trading

Asian Markets Decline in Morning Trading

3 New Investing Myths That Must Be Busted

3 New Investing Myths That Must Be Busted

Why a Global Stock Market Crash Is Coming

Why a Global Stock Market Crash Is Coming

Dump All Your Disney Stock: Doug Kass Insider

Dump All Your Disney Stock: Doug Kass Insider

What the Charts Say About the Big Picture: Cramer's 'Off The Charts'

What the Charts Say About the Big Picture: Cramer's 'Off The Charts'