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, let's take a look at several stocks that could experience big short squeezes when they report earnings this week.

Smith & Wesson

My first earnings short-squeeze play is firearm products maker Smith & Wesson (SWHC), which is set to release numbers on Thursday after the market close. Wall Street analysts, on average, expect Smith & Wesson to report revenue of $175.49 million on earnings of 35 cents per share.

The current short interest as a percentage of the float for Smith & Wesson is very high at 17.2%. That means that out of the 52.81 million shares in the tradable float, 9.12 million shares are sold short by the bears. If Smith & Wesson can report the earnings news the bulls are looking for, then this stock could easily rip sharply higher post-earnings as the bears move fast to cover some of their trades.

From a technical perspective, Smith & Wesson is currently trending above both its 50-day and 200-day moving averages, which is bullish. This stock broke out on Monday above some near-term overhead resistance at $15.59 with decent upside volume flows. That breakout is now starting to push shares of Smith & Wesson within range of triggering a much bigger breakout trade post-earnings.

If you're bullish on Smith & Wesson, then I would wait until after its report and look for long-biased trades if this stock manages to break out above its 52-week high of $17.28 a share with high volume. Look for volume on that move that registers near or above its three-month average action of 792,195 shares. If that breakout hits post-earnings, then this stock will set up to enter new 52-week-high territory, which is bullish technical price action. Some possible upside targets off that move are $20 to $25 a share.

I would simply avoid Smith & Wesson 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 its 50-day moving average of $14.78 a share to more support at $14.45 a share with high volume. If we get that move, then this stock will set up to re-test or possibly take out its next major support levels at $13 to $12.26 a share, or even its 200-day moving average of $11.91 a share.

KB Home

Another potential earnings short-squeeze trading opportunity is homebuilding player KB Home (KBH), which is set to release numbers on Friday before the market open. Wall Street analysts, on average, expect KB Home to report revenue $622.70 million on earnings of 8 cents per share.

The current short interest as a percentage of the float for KB Home is very high at 17.5%. That means that out of the 80.63 million shares in the tradable float, 14.17 million shares are sold short by the bears. If the bulls get the earnings news they're looking for, then this stock could easily rip sharply higher post-earnings as the bears scramble to cover some of their trades.

From a technical perspective, KB Home is currently trending below both its 50-day and 200-day moving averages, which is bearish. This stock has been consolidating and trending sideways over the last month and change, with shares moving between $14.02 on the downside and $15.27 on the upside. Shares of KB Home have now started to spike higher off its recent low of $14.21 and it's beginning to move within range of triggering a big breakout trade above the upper-end of its sideways trending chart pattern post-earnings.

If you're in the bull camp on KB Home, 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 its 200-day moving average of $15.20 to $15.27 a share with high volume. Look for volume on that move that hits near or above its three-month average volume of 3.44 million shares. If that breakout triggers post-earnings, then this stock will set up to re-test or possibly take out its next major overhead resistance levels at $16.34 to $17.19 a share, or $18.03 to its 52-week high of $18.98 a share. Any high-volume move above those levels will then give this stock a chance to tag or trend north of $20 a share.

I would simply avoid KB Home 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 $14.21 to $14.02 a share with high volume. If we get that move, then this stock will set up to re-test or possibly take out its next major support levels at $13.19 to $12 a share.

Finisar

Another potential earnings short-squeeze candidate is networking and communication devices player Finisar (FNSR), which is set to release numbers on Thursday after the market close. Wall Street analysts, on average, expect Finisar to report revenue of $320.65 million on earnings of 25 cents per share.

The current short interest as a percentage of the float for The Finisar is pretty high at 9%. That means that out of the 102.93 million shares in the tradable float, 9.26 million shares are sold short by the bears. The right earnings news from Finisar could easily spark a large short-squeeze post-earnings that sends the bears scrambling to cover some of their positions.

From a technical perspective, Finisar is currently trending above both its 50-day and 200-day moving averages, which is bullish. This stock has been uptrending over the last month and change, with shares moving higher from its low of $20.32 to its recent high of $23.14 a share. During that uptrend, this stock has been making mostly higher lows and higher highs, which is bullish technical price action. That move has now pushed shares of Finisar within range of triggering a big breakout trade post-earnings.

If you're bullish on Finisar, 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 $23.14 to its 52-week high of $23.38 a share with high volume. Look for volume on that move that registers near or above its three-month average action of 900,297 shares. If that breakout materializes post-earnings, then this stock will set up to enter new 52-week-high territory, which is bullish technical price action. Some possible upside targets off that move are $32.50 to $35 a share.

I would avoid Finisar 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 its 50-day moving average of $21.53 to $21 a share with high volume. If we get that move, then this stock will set up to re-test or possibly take out its next major support levels at its 200-day moving average of $19.37 to $18 a share.

CarMax

Another earnings short-squeeze prospect is used vehicles retailer CarMax (KMX), which is set to release numbers on Friday before the market open. Wall Street analysts, on average, expect CarMax to report revenue of $320.54 million on earnings of 3 cents per share.

The current short interest as a percentage of the float for CarMax is notable 5.3%. That means that out of 206.61 million shares in the tradable float, 11.08 million shares are sold short by the bear. This isn't a huge short interest, but it's more than enough to spark a decent short-covering rally post-earnings for shares of CarMax if the bulls get the earnings news they're looking for.

From a technical perspective, CarMax 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 uptrending over the last three months and change, with shares moving higher from its low of $61.98 to its recent high of $73.76 a share. During that move, shares of CarMax have been making mostly higher lows and higher highs, which is bullish technical price action. That move has now pushed this stock within range of triggering a big breakout trade post-earnings.

If you're bullish on CarMax, 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 $73.76 to its 52-week high of $75.40 a share with high volume. Look for volume on that move that hits near or above its three-month average volume of 1.54 million shares. If that breakout gets set off post-earnings, then this stock will set up to enter new 52-week-high territory, which is bullish technical price action. Some possible upside targets off that move are $85 to $90 a share.

I would simply avoid CarMax 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 $70 to $67.69 a share with high volume. If we get that move, then this stock will set up to re-test or possibly take out its next major support levels at $65 to $62 a share.

Rite Aid

My final earnings short-squeeze play is retail drugstore chain operator Rite Aid (RAD), which is set to release numbers on Thursday before the market open. Wall Street analysts, on average, expect Rite Aid to report revenue of $6.65 billion on earnings of 3 cents per share.

The current short interest as a percentage of the float for Rite Aid stands at 3.2%. That means that out of the 979.29 million shares in the tradable float, 32.19 million shares are sold short by the bears. The bears have also been increasing their bets from the last reporting period by 12.1%, or by around 3.46 million shares. If bears get caught pressing their bets into a bullish quarter, then shares of Rite Aid could easily soar sharply higher post-earnings as the bears are forced to cover some of their positions.

From a technical perspective, Rite Aid is currently trending above both its 50-day and 200-day moving averages, which is bullish. This stock has been uptrending over the last six months, with shares moving higher from its low of around $6 a share to its recent high of $9.07 a share. During that uptrend, this stock has been making mostly higher lows and higher highs, which is bullish technical price action.

If you're in the bull camp on Rite Aid, 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 $9.02 to its 52-week high of $9.07 a share with high volume. Look for volume on that move that registers near or above its three-month average action of 25.19 million shares. If that breakout kicks off post-earnings, then this stock will set up to enter new 52-week-high territory, which is bullish technical price action. Some possible upside targets off that mover are $10 to $11 a share, or even $12 a share.

I would avoid Rite Aid 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 $8.32 a share to some more near-term support at $8.17 a share with high volume. If we get that move, then this stock will set up to re-test or possibly take out its next major support levels at $7.65 to $7.22 a share, or even its 200-day moving average of $7 a share.

This article is commentary by an independent contributor. At the time of publication, the author held no positions in the stocks mentioned.

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