5 Must-See Short-Squeeze Plays: Krispy Kreme and More

 

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.

Hovnanian Enterprises

My first earnings short-squeeze play is homebuilding player Hovnanian Enterprises (HOV) , which is set to release numbers on Wednesday before the market open. Wall Street analysts, on average, expect Hovnanian Enterprises to report revenue of $646.77 million on earnings of 21 cents per share.

The current short interest as a percentage of the float for Hovnanian Enterprises is very high at 13%. That means that out of the 122.28 million shares in the tradable float, 15.92 million shares are sold short by the bears. If the bulls get the earnings news they're looking for, then shares of HOV could easily rip sharply higher post-earnings as the bears jump to cover some of their positions.

From a technical perspective, HOV is currently trending below its 200-day moving average and just above its 50-day moving average, which is neutral trendwise. This stock has pulled back off its recent high of $4.42 a share to right above its 50-day moving average of $3.86 a share. That pullback is coming after a solid uptrend from its October low of $3.06 to that $4.42 a share high. Shares of HOV are now trending within range of triggering a big breakout trade post-earnings.

If you're bullish on HOV, 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 its 200-day moving average of $4.37 a share to $4.42 to $4.75 a share with high volume. Look for volume on that move that hits near or above its three-month average action of 2.48 million shares. If that breakout hits post-earnings, then HOV will set up to re-test or possibly take out its next major overhead resistance levels at $5.30 to $6 a share.

I would simply avoid HOV 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 $3.86 a share to some more near-term support at $3.65 a share with high volume. If we get that move, then HOV will set up to re-test or possibly take out its next major support level at its 52-week low of $3.06 a share.

Krispy Kreme Doughnuts

Another potential earnings short-squeeze trade idea is doughnuts, beverages and packaged sweets branded retail operator Krispy Kreme Doughnuts (KKD) , which is set to release its numbers on Tuesday after the market close. Wall Street analysts, on average, expect Krispy Kreme Doughnuts to report revenue $124.35 million on earnings of 19 cents per share.

The current short interest as a percentage of the float for Krispy Kreme Doughnuts is pretty high at 9.4%. That means that out of the 63.71 million shares in the tradable float, 6.04 million shares are sold short by the bears. The bears have also been increasing their bets from the last reporting period by 3.6%, or by 210,000 shares. If the bears get caught pressing their bets into a bullish quarter, then shares of KKD could easily rip sharply higher post-earnings as the shorts move quickly to cover some of their positions.

From a technical perspective, KKD is currently trending above both its 50-day and 200-day moving averages, which is bullish. This stock has been uptrending strong for the last four months, with shares moving higher from its low of $14.82 to its recent high of $21.08 a share. During that uptrend, shares of KKD have been making mostly higher lows and higher highs, which is bullish technical price action. That move has now pushed shares of KKD within range of triggering a big breakout trade post-earnings.

If you're in the bull camp on KKD, 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 $21.08 to its 52-week high at $21.30 a share with high volume. Look for volume on that move that registers near or above its three-month average volume of 635,314 shares. If that breakout kicks off post-earnings, then KKD will set up to enter new 52-week-high territory, which is bullish technical price action. Some possible upside targets off that breakout are $25 to $27, or even $30 a share.

I would simply avoid KKD or look for short-biased trades if after earnings it fails to trigger that breakout and then drops back below some near-term support levels at $19.50 a share to its 50-day at $18.71 a share with high volume. If we get that move, then KKD will set up to re-test or possibly take out its next major support levels at its 200-day moving average of $17.57 to $16.50 a share, or even $15 a share.

Casey's General Stores

Another potential earnings short-squeeze candidate is convenience stores operator Casey's General Stores (CASY) , which is set to release numbers on Wednesday after the market close. Wall Street analysts, on average, expect Casey's General Stores to report revenue of $2.18 billion on earnings of $1.17 per share.

The current short interest as a percentage of the float for Casey's General Stores is notable at 4.6%. That means that out of the 38.27 million shares in the tradable float, 1.78 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 the bulls get the earnings news they're looking for.

From a technical perspective, CASY is currently trending above both its 50-day and 200-day moving averages, which is bullish. This stock has been uptrending very strong for the last four months and change, with shares moving higher from its low of $65.54 to its recent high of $88.66 a share. During that uptrend, shares of CASY have been making mostly higher lows and higher highs, which is bullish technical price action. That move has now pushed shares of CASY within range of triggering a major breakout trade post-earnings.

If you're bullish on CASY, 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 $86 to its 52-week high of $88.66 a share with high volume. Look for volume on that move that registers near or above its three-month average action of 260,145 shares. If that breakout develops post-earnings, then CASY will set up to enter new 52-week-high territory, which is bullish technical price action. Some possible upside targets off that breakout are $100 to $110 a share, or even $115 a share.

I would avoid CASY or look for short-biased trades if after earnings it fails to trigger that breakout and then drops back below some near-term support levels at $81.63 to its 50-day moving average of $79.68 a share and then below more support at $79.20 a share with high volume. If we get that move, then CASY will set up to re-test or possibly take out its next major support levels at $74 to its 200-day moving average of $71.42 a share.

Ciena

Another earnings short-squeeze prospect is communications network equipment provider player Ciena (CIEN) , which is set to release numbers on Thursday before the market open. Wall Street analysts, on average, expect Ciena to report revenue of $589.44 million on earnings of 13 cents per share.

The current short interest as a percentage of the float for Ciena is extremely high at 17.7%. That means that out of 19.04 million shares in the tradable float, 3.36 million shares are sold short by the bears. The bears have also been increasing their bets from the last reporting period by 2.9%, or by 513,000 shares. If the bears get caught pressing their bets into a strong quarter, then shares of CIEN could easily jump sharply higher post-earnings as the shorts scramble to cover some of their trades.

From a technical perspective, CIEN is currently trending above its 50-day moving average and below its 200-day moving average, which is neutral trendwise. This stock has been uptrending over the last month, with shares moving higher from its low of $14.69 to its intraday high of $17.45 a share. During that move, shares of CIEN have been making mostly higher lows and higher highs, which is bullish technical price action. That move has now pushed shares of CIEN within range of triggering a near-term breakout trade post-earnings.

If you're bullish on CIEN, 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 $18 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 materializes post-earnings, then CIEN will set up to re-test or possibly take out its next major overhead resistance levels at $20 to $21 a share, or even $23 a share.

I would simply avoid CIEN 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 $16.01 a share to more near-term support at $15.88 a share with high volume. If we get that move, then CIEN will set up to re-test or possibly take out its next major support levels at $14.69 to its 52-week low of $13.77 a share.

Restoration Hardware

My final earnings short-squeeze play home furnishing stores player Restoration Hardware (RH) , which is set to release numbers on Wednesday after the market close. Wall Street analysts, on average, expect Restoration Hardware to report revenue of $481.98 million on earnings of 48 cents per share.

The current short interest as a percentage of the float for Restoration Hardware is extremely high at 33%. That means that out of the 32.43 million shares in the tradable float, 10.73 million shares are sold short by the bears. This is a huge short interest on a stock with a relatively low tradable float. Any bullish earnings news could easily set off a monster short-squeeze for shares of RH post-earnings.

From a technical perspective, RH is currently trending above both its 50-day and 200-day moving averages, which is bullish. This stock has been uptrending over the last two months, with shares moving higher from its low of $69.80 to its recent high of $89.07 a share. During that uptrend, shares of RH have been making mostly higher lows and higher highs, which is bullish technical price action. That move has now pushed shares of RH within range of triggering a big breakout trade post-earnings.

If you're in the bull camp on RH, 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 $89.07 to $90.71 a share with high volume. Look for volume on that move that hits near or above its three-month average action of 944,148 shares. If that breakout develops post-earnings, then RH will set up to re-test or possibly take out its all-time high at $94.50 a share. Any high-volume move above that level will then give RH a chance to trend north of $100 a share.

I would avoid RH 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 $82.50 a share to its 50-day moving average of $80.011 a share with high volume. If we get that move, then RH will set up to re-test or possibly take out its next major support levels at its 200-day moving average of $76.23 to $69.80 a share.

-- 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.

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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