5 Earnings Short-Squeeze Plays: Neptune Technologies 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.

CLARCOR

My first earnings short-squeeze play is filtration products and systems player CLARCOR  (CLC) , which is set to release numbers on Wednesday after the market close. Wall Street analysts, on average, expect CLARCOR to report revenue of $416.11 million on earnings 85 cents per share.

The current short interest as a percentage of the float for CLARCOR is notable 5.4%. That means that out of the 49.87 million shares in the tradable float, 2.69 million shares are sold short by the bears. This isn't a large short interest, but it's more than enough to spark a decent short-covering rally post-earnings if the bulls get the earnings news they're looking for.

From a technical perspective, CLC is currently trending below its 50-day moving average and just above its 200-day moving average, which is neutral trendwise. This stock has been downtrending over the last few weeks, with shares moving lower from its high of $68.52 to its intraday low on Monday of $61.84 a share. During that downtrend, shares of CLC have been consistently making lower highs and lower lows, which is bearish technical price action.

If you're bullish on CLC, 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 $64.55 to its 50-day moving average of $65.92 a share with high volume. Look for volume on that move that registers near or above its three-month average action of 245,408 shares. If that breakout hits post-earnings, then shares of CLC will set up to re-test or possibly take out its 52-week high of $68.72 a share. Any high-volume move above that level will then give CLC a chance to trend north of $70 a share.

I would simply avoid CLC 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 $61.20 a share with high volume. If we get that move, then CLC will set up to re-test or possibly take out its next major support levels at $58.38 to $57.61 a share, or even $55 to $52 a share.

Westamerica Bancorp

Another potential earnings short-squeeze trade idea is regional banking player Westamerica Bancorp  (WABC) , which is set to release its numbers on Thursday during trading hours. Wall Street analysts, on average, expect Westamerica Bancorp to report revenue $50.46 million on earnings of 58 cents per share.

The current short interest as a percentage of the float for Westamerica Bancorp is reasonably high at 11.8%. That means that out of the 24.76 million shares in the tradable float, 2.92 million shares are sold short by the bears. This is a decent short interest on a stock with a very low tradable float. Any bullish earnings news could easily spark a large short-covering rally for shares of WABC post-earnings as the bears rush to cover some of their bets.

From a technical perspective, WABC is currently below both its 50-day and 200-day moving averages, which is bearish. This stock has been downtrending over the last few weeks, with shares moving lower from its high of $50 to its intraday low on Monday of $45.08 a share. During that downtrend, shares of WABC have been consistently making lower highs and lower lows, which is bearish technical price action.

If you're in the bull camp on WABC, 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 $47.50 to its 50-day at $48.62 a share and its 200-day at $48.74 a share with high volume. Look for volume on that move that hits near or above its three-month average volume of 137,849 shares. If that breakout develops post-earnings, then WABC will set up to re-test or possibly take out its next major overhead resistance levels at $51.24 to $53.10 a share, or even $54.08 to its 52-week high at $55.45 a share.

I would simply avoid WABC 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 $42.71 a share with high volume. If we get that move, then WABC will set up to enter new 52-week-low territory, which is bearish technical price action. Some possible downside targets off that move are $39 to $38 a share.

Linear Technology

Another potential earnings short-squeeze candidate is semiconductor player Linear Technology  (LLTC) , which is set to release numbers on Tuesday after the market close. Wall Street analysts, on average, expect Linear Technology to report revenue of $354.57 million on earnings of 50 cents per share.

The current short interest as a percentage of the float for Linear Technology is notable at 4.3%. That means that out of the 235.75 million shares in the tradable float, 10.21 million shares are sold short by the bears. If this company can deliver the earnings news the bulls are looking for, then shares of LLTC could easily rip sharply higher post-earnings as the bears jump to cover some of their positions.

From a technical perspective, LLTC is currently trending above both its 50-day and 200-day moving averages, which is bullish This stock has been uptrending strong over the last three months and change, with shares moving higher from its low of around $38 a share to its recent high of $47.13 a share. During that uptrend, shares of LLTC have been making mostly higher lows and higher highs, which is bullish technical price action. That move has now pushed shares of LLTC within range of triggering a big breakout trade post-earnings above some key near-term overhead resistance levels.

If you're bullish on LLTC, 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 $47 to $47.13 a share with high volume. Look for volume on that move that registers near or above its three-month average action of 2.57 million shares. If that breakout materializes post-earnings, then LLTC will set up to re-test or possibly take out its next major overhead resistance level at its 52-week high of $51.77 a share. Any high-volume move above that level will then give LLTC a chance to make a run at $55 to $60 a share.

I would avoid LLTC 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 $43.57 to $43 a share with high volume. If we get that move, then LLTC will set up to re-test or possibly take out its next major support levels at $40 to its 52-week low of $37.56 a share.

Neptune Technologies & Bioressources

Another earnings short-squeeze prospect is biotechnology player Neptune Technologies & Bioressources  (NEPT) , which is set to release numbers on Tuesday after the market close. Wall Street analysts, on average, expect Neptune Technologies & Bioressources to report revenue of $5.60 million on a loss of 5 cents per share.

The current short interest as a percentage of the float for Neptune Technologies & Bioressources stands at 5.6%. That means that out of 52.94 million shares in the tradable float, 2.97 million shares are sold short by the bears. If the bulls get the earnings news they're looking for, then shares of NEPT could easily explode sharply higher post-earnings as the bears move fast to cover some of their positions.

From a technical perspective, NEPT is currently trending above its 50-day moving average and just below its 200-day moving average, which is neutral trendwise. This stock has just started to spike higher above its 50-day moving average of $1.87 a share with decent upside volume flows. That spike is quickly pushing shares of NEPT within range of triggering a near-term breakout trade post-earnings above some key overhead resistance levels.

If you're bullish on NEPT, 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 $2.04 a share to its 200-day at $2.12 a share and then above $2.20 a share with high volume. Look for volume on that move that hits near or above its three-month average volume of 114,589 shares. If that breakout develops post-earnings, then NEPT will set up to re-test or possibly take out its next major overhead resistance levels at $2.40 to close to $3 a share.

I would simply avoid NEPT 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 $1.72 to $1.62 a share and then below $1.51 a share with high volume. If we get that move, then NEPT will set up to re-test or possibly take out its next major support level at its 52-week low of $1.11 a share.

Fastenal

My final earnings short-squeeze play is industrial and construction supplies retailer Fastenal  (FAST) , which is set to release numbers on Thursday before the market open. Wall Street analysts, on average, expect Fastenal to report revenue of $935.84 million on earnings of 39 cents per share.

The current short interest as a percentage of the float for Fastenal is pretty high at 11.4%. That means that out of the 272.30 million shares in the tradable float, 31.28 million shares are sold short by the bears. The bears have also been increasing their bets from the last reporting period by 3.2%, or by about 1 million shares. If the bears get caught pressing their bets into a bullish quarter, then shares of FAST could easily spike sharply higher post-earnings as the shorts move fast to cover some of their trades.

From a technical perspective, FAST is currently trending just below both its 50-day and 200-day moving averages, which is bearish. This stock has been uptrending strong over the last three months and change, with shares moving higher from its low of $39.94 to its recent high of $48.43 a share. During that uptrend, shares of FAST have been making mostly higher lows and higher highs, which is bullish technical price action. That move has now pushed shares of FAST within range of triggering a near-term breakout trade post-earnings.

If you're in the bull camp on FAST, 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 $46.58 to $48.43 a share with high volume. Look for volume on that move that registers near or above its three-month average action of 1.81 million shares. If that breakout kicks off post-earnings, then FAST will set up to re-test or possibly take out its next major overhead resistance levels at $50.40 to $51.36 a share, or even its 52-week high at $52.21 a share. Any high-volume move above $52.21 a share will then give FAST a chance to tag $55 to $60 a share.

I would avoid FAST 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 $45.13 to $44.47 a share and then below more support at $44.17 to $43.86 a share with high volume. If we get that move, then FAST will set up to re-test or possibly take out its next major support levels at $41.50 to its 52-week low of $40.18 a share. Any high-volume move below $40.18 a share will then give FAST a chance to tag $35 a share.

-- Written by Roberto Pedone in Delafield, Wis.

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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