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5 Earnings-Related Short-Squeeze Plays

Roberto Pedone | Contributor
Wednesday, 2 Jan 2013 | 12:31 PM ET
Alan Copson | Photographer's Choice RF | Getty Images

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 the 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.

Finish Line

My first earnings short-squeeze trade idea is Finish Line, which is set to release numbers on Friday before the market open. This is an athletic footwear store offering large selection of men's, women's and kids' performance and athletic casual shoes, as well as an assortment of apparel and accessories. Wall Street analysts, on average, expect Finish Line to report revenue of $296.67 million on earnings of 10 cents per share.

The current short interest as a percentage of the float for Finish Line sits at 5.8 percent. That means that out of the 49.10 million shares in the tradable float, 2.91 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.

From a technical perspective, FINL is currently trending below both its 50-day and 200-day moving averages, which is bearish. This stock has been downtrending for the last four months, with shares dropping from a high of $23.42 to its recent low of $17.41 a share. During that move, shares of FINL have been mostly making lower highs and lower lows, which is bearish technical price action. That said, shares of FINL have started to bounce off that $17.41 low and move within range of triggering a near-term breakout trade.

If you're bullish on FINL, 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 $18.97 to its 50-day moving average at $20.01 a share with high volume. Look for volume on that move that hits near or above its three-month average action of 709,962 shares. If that breakout triggers, then FINL will set up to re-test or possibly take out its next major overhead resistance levels at $21.21 to $21.43 a share. Any high-volume move above those levels and more resistance at $21.51 will then put $23 to $23.50 into focus for shares of FINL.

I would simply avoid FINL 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 $17.41 a share with high volume. If we get that move, then FINL will set up to re-test or possibly take out its next major support level at $16.16 a share.

Family Dollar Stores

Another potential earnings short-squeeze play is Family Dollar Stores, which is set to release its numbers on Thursday before the market open. This company operates more than 6,600 general merchandise retail discount stores in 44 states. Merchandise assortment includes consumables, home products, apparel accessories, seasonal and electronics. Wall Street analysts, on average, expect Family Dollar Stores to report revenue of $2.38 billion on earnings of 75 cents per share.

During the last quarter, this company reported a profit of 75 cents per share versus a mean estimate of 75 cents per share. This occurred after two consecutive quarters of topping Wall Street estimates. This company is looking to register its fifth straight quarter of revenue increases when it reports this week, and its fourth straight quarter of positive earnings.

The current short interest as a percentage of the float for Family Dollar Stores stands at 4.4 percent. That means that out of the 87.35 million shares in the tradable float, 4.87 million shares are sold short by the bears. The bears have also been increasing their bets from the last reporting period by 11.6 percent, or by about 506,000 shares. If the bears are caught leaning too hard into this quarter, then we could see shares of FDO spike notably higher post-earnings.

From a technical perspective, FDO 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 dropping from a high of $72.30 to its recent low of $61.90 a share. During that downtrend, shares of FDO have been mostly making lower highs and lower lows, which is bearish technical price action. That said, shares of FDO have started to bump up against oversold territory, since its current relative strength index (RSI) reading is 33.

If you're in the bull camp on FDO, 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 $63.35 to $64 a share with high volume. Look for volume on that move that registers near or above its three-month average action of 1,597,440 shares. If that breakout triggers, then FDO will set up to re-test or possibly take out its 200-day moving average at $65.60 or its 50-day moving average at $66.45 a share.

I would simply avoid FDO 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 $61.90 to $60.86 a share with high volume. If we get that action, then FDO will set up to re-test or possibly take out its next major support level that sits just below $58 a share.

Sonic

One potential earnings short-squeeze candidate is Sonic, which is set to release numbers on Thursday after the market close. This company operates and franchises a chain of quick-service drive-in restaurants in the United States. Wall Street analysts, on average, expect Sonic to report revenue of $126.45 million on earnings of 11 cents per share.

If you're looking for a stock with a decent short interest that's been uptrending strongly heading into its earnings report, then make sure to check out shares of Sonic. This stock trended strong in 2012, with shares up a whopping 52 percent.

The current short interest as a percentage of the float for Sonic is notable at 6.5 percent. That means that out of the 54.27 million shares in the tradable float, 3.52 million shares are sold short by the bears. If this company can deliver the earnings news the bulls are looking for, then we could easily see a solid short-squeeze develop post-earnings.

From a technical perspective, Sonic is currently trending above both its 50-day and 200-day moving averages, which is bullish. This stock has been uptrending strongly for the last two months, with shares moving higher from a low of $9.06 to its recent high of $10.64 a share. During that uptrend, shares of Sonic have been mostly making higher lows and higher highs, which is bullish technical price action. That move has now pushed Sonic within range of triggering a major breakout trade post-earnings.

If you're bullish on Sonic, 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 $10.64 to $10.83 a share and then once it takes out more overhead resistance at $10.94 a share with high volume. Look for volume on that move that registers near or above its three-month average action of 516,313 shares. If that breakout triggers, then Sonic will set up to enter new 52-week high territory, which is bullish technical price action.

I would avoid Sonic 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 at $10.01 a share with volume. If we get that move, then SONC will set up to re-test or possibly take out its next major support levels at $9.62 to its 200-day moving average at $9.20 a share.

AngioDynamics

Another earnings short-squeeze play is AngioDynamics, which is set to release numbers on Thursday after the market close. This company provides medical devices used in minimally invasive, image-guided procedures to treat peripheral vascular disease, and local oncology therapy options for treating cancer. Wall Street analysts, on average, expect AngioDynamics to report revenue of $87.39 million on earnings of 9 cents per share.

The current short interest as a percentage of the float for AngioDynamics is notable at 5 percent. That means that out of the 18.74 million shares in the tradable float, 1.25 million shares are sold short by the bears. This isn't a huge short interest, but it's more than enough to spike the stock dramatically post-earnings if a solid short-covering rally materializes.

From a technical perspective, AngioDynamics 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 modestly for the last two months, with shares moving higher from a low of $10 to its recent high of $11.20 a share. During that uptrend, shares of AngioDynamics have been mostly making higher lows and higher highs, which is bullish technical price action. That move has now pushed AngioDynamics within range of triggering a near-term breakout trade post-earnings.

If you're bullish on AngioDynamics, 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 $11.20 to its 200-day moving average at $11.54 a share with high volume. Look for volume on that move that hits near or above its three-month average action of 91,003 shares. If that breakout hits, then AngioDynamics will set up to re-test or possibly take out its next major overhead resistance level $12 a share. Any high-volume move above $12 will then give AngioDynamics a chance to re-fill its previous gap down zone that started near $13 a share.

I would avoid AngioDynamics or look for short-biased trades if after earnings it fails to trigger that breakout, and then drops back below its 50-day at $10.61 a share with heavy volume. If we get that move, then AngioDynamics will set up to re-test or possibly take out its next major support levels at $10.25 to $10 a share. Keep in mind that any move below $10 will then push AngioDynamics into new 52-week low territory, which is bearish technical price action.

National American University

My final earnings short-squeeze trade idea is National American University, which is set to release numbers on Wednesday after the market close. This company is a provider of post-secondary education primarily focused on the needs of working adults and other non-traditional students. It provides Associate, Bachelor's and Master's degree and diploma program. Wall Street analysts, on average, expect National American University to report revenue of $34.72 million on earnings of 9 cents per share.

The current short interest as a percentage of the float for National American University stands at 3 percent. That means that out of the 7.48 million shares in the tradable float, 289,000 shares are sold short by the bears. This isn't a huge short interest, but it's more than enough to kickoff a decent short-squeeze if the bulls get the earnings news they're looking for.

From a technical perspective, National American University is currently trending below both its 50-day and 200-day moving averages, which is bearish. This stock has been downtrending for the last four months, with shares dropping from a high of $5.05 to its recent low of $3.22 a share. During that downtrend, shares of National American University have been consistently making lower highs and lower lows, which is bearish technical price action. That said, shares of National American University have started to rebound off that $3.22 low and move within range of triggering a near-term breakout trade post-earnings.

If you're in the bull camp on National American University, 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 its 50-day moving average of $3.91 and then once it takes out more overhead resistance levels at $4.15 to $4.25 a share with high volume. Look for volume on that move that hits near or above its three-month average action of 20,371 shares. If that breakout hits, then National American University will set up to re-test or possibly take out its next major overhead resistance levels at $4.41 to $4.70 a share. Any high-volume move above those levels will then put $4.80 to $5.05 into focus for shares of National American University.

I would simply avoid National American University after its reports if it fails to trigger that breakout, and then drops back below that recent low of $3.22 a share with high volume. Any move below $3.22 a share will then push National American University into new 52-week low territory, which is bearish technical price action.

—By TheStreet.com Contributor Roberto Pedone

Additional News: Nike's Latest Earnings Report

Additional Views: No All-Clear for Stocks From 'Fiscal Cliff' Deal

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Disclosures:

At the time of publication, Roberto Pedone had no positions in stocks mentioned.

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Disclaimer

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