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5 Earnings Stocks Poised to Pop

Roberto Pedone|Stockpickr
Wednesday, 28 Mar 2012 | 11:41 AM ET
Caroline Purser | Photographer's Choice | Getty Images

Short-sellers hate being caught short a stock that produces earnings that please the bulls. 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 timeframe 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. That’s why it can be worth betting prior to the report — buy only if you have a very strong conviction that the stock is going to rip higher, and its acting technically very bullish.

With that in mind, here’s a look at several stocks that could experience big short squeezes when they report earnings this week.

5. Saba Software

My first earnings short-squeeze trade candidate is software and programming player Saba Software, which is set to release its numbers on Thursday after the market close. This company provides a class of people systems that combine people learning, people performance, and people collaboration solutions. Wall Street analysts, on average, expect Saba Software to report revenue of $33.27 million on a loss of 4 cents share.

If you’re looking for a small-cap stock that’s uptrending strong heading into its earnings report, then make sure to check out shares of Saba Software. This stock is up a whopping 60 percent so far in 2012, and shares are trading within shouting range of its 52-week high of $13.11.

The current short interest as a percentage of the float for Saba Software is notable at 6.4 percent. That means that out of the 28.18 million shares in the tradable float, 1.64 million shares are sold short by the bears. The bears have also been increasing their short positions from the last reporting period by 27 percent, or by about 350,000 shares.

From a technical perspective, Saba is currently trading above both its 50-day and 200-day moving averages, which is bullish. This stock has been on a tear uptrending strong for the last six months from $5.07 in October towards its current price of just under $13 a share. During that uptrend, Saba has consistently made higher lows and higher highs, which is bullish price action.

If you’re bullish on Saba, I would wait until after its report and look for long-biased trades if this stock breaks out above some near-term overheard resistance at $13.11, or if it a makes a new 52-week high with volume. Look for volume that’s near or well above its three-month average action of 290,694 shares. If we get that action, then look for this stock to quickly hit $15 a share or higher post-earnings.

I would simply avoid Saba or look for short-biased trades if after earnings this stock fails to break out over $13.11 and make new 52-week highs. Target a drop back towards its 50-day moving average of $11.36 or lower if you see high-volume sellers come into this name post-earnings.

4. Best Buy

Another earnings short-squeeze candidate is Best Buy, which is set to release numbers on Thursday before the market opens. This company is a multinational retailer of consumer electronics, home office products, entertainment products, appliances, and related services. Wall Street analysts, on average, expect Best Buy to report revenue of $17.22 billion on earnings of $2.16 per share.

During the last quarter, Best Buy missed Wall Street estimates by 4 cents after reporting a profit of 47 cents per share. The company also missed Wall Street estimates for its second-quarter earnings report. On a positive note, Best Buy could produce its third-straight quarter of revenue increased on the top line. This stock is up over 15 percent in 2012 as we move closer to its earnings report.

The current short interest as a percentage of the float for Best Buy is very high at 17.1 percent. That means that out of the 279.59 million shares in the tradable float, 47.84 million shares are sold short by the bears. The bears have also been increasing their bets from the last reporting period by 6.8 percent, or by about 3.05 million shares.

From a technical perspective, Best Buy is currently trading above both its 50-day and 200-day moving averages, which is bullish. This stock has seen buying interest during the last few months at around $22.30 to $23.40 a share. On the flipside, shares of Best Buy have run into selling resistance at around $28.22 to $28 a share.

If you’re bullish on Best Buy, I would wait until after it reports earnings and only look for long-biased trades if it breaks out above some overhead resistance at $28.33 to $29.50 a share with high-volume. Look for volume on that move that’s near or well above its three-month average volume of 5.5 million shares. If we get that action, I would look for BBY to make a run at its 52-week high of $32.85 if the bulls push this higher post-earnings.

I would simply avoid Best Buy, or look for short-biased trades if it fails to break out post-earnings above some near-term overhead resistance at $28 a share, and then sells off with heavy volume through its 200-day moving average of $25.94 and 50-day of $25.24. If we get that action, look for the stock to drop back towards $23 to $22 a share if the bears drill it.

3. Xyratex

One potential earnings short-squeeze trade in the computer storage sector is Xyratex, which is set to report results on Thursday after the market close. This company provides modular solutions for the enterprise data storage industry and hard disk drive capital equipment for the HDD industry. Street analysts, on average, expect Xyratex to report revenue of $316.51 million on earnings of 26 cents per share.

Stifel Nicolaus recently cut its rating on this stock to “hold” from “buy,” citing that the stock has a more balanced risk/reward after a 25 percent rally year-to-date, and an 80 percent move since early October. Despite that recent downgrade, this stock is trending very strong and trading just one point off its 52-week high of $17.52 a share.

The current short interest as a percentage of the float for Xyratex sits at 4.4 percent. That means that out of the 26.76 million shares in the tradable float, 1.19 million are sold short by the bears. The bears have also been increasing their bets from the last reporting period by 11.3 percent, or by about 121,000 shares. This isn’t a huge short interest, but it's more than enough to spark a decent short-covering rally if the company can report strong earnings and bullish guidance.

From a technical perspective, Xyratex is currently trading above both its 50-day and 200-day moving averages, which is bullish. This stock has soared from its October low of $9.01 to a recent high of $17.52 a share. During that move, Xyratex has consistently made higher lows and higher highs, which is bullish price action. Now the stock is trading within range of triggering a big breakout trade post-earnings.

If you’re bullish on Xyratex, I would wait until after its report and look for long-biased trades if the stock breaks out above some overhead resistance at $17.52 to $17.68 a share with high-volume. Look for volume on a move over those levels that are near or well above its three-month average volume of 266,334 shares. If we get that action, then look for Xyratex to tag $20 or higher if the bulls gain full control of this stock post-earnings.

I would simply avoid Xyratex or look for short-biased trades if after earnings that breakout never triggers and the stock drops back below its 50-day at $16.55 a share, and then below some near-term support at $15.95 with high-volume. If we get that move, then look for Xyratex to drop pretty big sine the next nearest support level is near $14.50 to $13 a share.

2. Jos. A. Bank Clothiers

Another potential earnings short-squeeze play in the retail apparel sector is Jos. A. Bank Clothiers, which is set to release numbers on Thursday before the market open. This is a designer, manufacturer, retailer, and direct marketer of men’s tailored and casual clothing and accessories and is a retailer of tuxedo rental products. Wall Street analysts, on average, expect Jos. A. Bank Clothiers to report revenue of $352.75 million on earnings of $1.58 per share.

If you’re looking for uptrending heavily shorted stock, that’s within range of some major breakout levels heading into its earnings report, then take a good look at shares of Jos. A. Bank Clothiers. This stock is up more than 10 percent so far in 2012, and it’s currently trading within range of its 52-week high of $57.14.

The current short interest as a percentage of the float for Jos. A. Bank Clothiers is pretty high at 14.6 percent. That means that out of the 27.49 million shares in the tradable float, 4.02 million are sold short by the bears. This is a high-short-interest and low-float situation, so any bullish earnings news could easily set off a big short squeeze.

From a technical perspective, Jos. A. Bank Clothiers is currently trading above both its 50-day and 200-day moving averages, which is bullish. This stock has been uptrending strong since January, with shares consistently making higher lows and higher highs, which is bullish price action. That strong move higher has now pushed Jos. A. Bank Clothiers within range of making new 52-week highs off a strong earnings report and bullish forward guidance.

If you’re bullish on Jos. A. Bank Clothiers, I would wait until after they report earnings and look for long-biased trades if the stock breaks out above $55 to $57.14 a share with heavy volume. Look for volume on that move that registers close to or above its three-month average volume of 294,844 shares. If we get that move, then look for Jos. A. Bank Clothiers to trade up towards $60 to $65 a share if the bulls force the bears to cover some of those short bets.

I would avoid Jos. A. Bank Clothiers or look for short-biased trades if the stock fails to trigger that breakout after earnings and then drops below some near-term support at $52.50 a share with high volume. Target a drop back towards its 50-day moving average of $50.99 a share, or possibly lower if the bears sell this stock off hard post-earnings.

1. Worthington Industries

An earnings short-squeeze candidate in the iron and steel complex is Worthington Industries, which is set to release numbers on Thursday before the market open. This is a diversified metals processing company, focused on steel value-added steel processing and manufactured metal products. Wall Street analysts, on average, expect Worthingtonto report revenue of $590.68 million on earnings of 35 cents per share.

If you’re looking for a heavily shorted commodities-related stock that’s within range of triggering a major near-term breakout post-earnings, then make sure to check out shares of Worthington.

The current short interest as a percentage of the float for Worthington is rather high at 8.3 percent. That means that out of the 51.35 million shares in the tradable float, 4.26 million are sold short by the bears. The bears have also been increasing the bets from the last reporting period by 7.7 percent, or by about 306,000 shares. If the bears are caught leaning too strong into this quarter, then shares of Worthington could short-squeeze big.

From a technical perspective, Worthington is currently trading above both its 50-day and 200-day moving averages, which is bullish. This stock has put in a solid run since its October low of $12.92 a share, since shares are not changing hands at just under $18.50 as share. The stock recently found some buying support right off its 200-day moving average, and it’s now within range of some major breakout levels ahead of its quarter.

If you’re bullish on Worthington, I would look for long-biased trades after it reports earnings if this stock manages to break out above some near-term overhead resistance at $18.82 to 19.33 a share with strong volume. Look for volume that hits near or above its three-month average volume of 521,677 shares. If we get that action, then keep in mind that Worthington has little overhead resistance until $23 a share.

I would simply avoid Worthington or look for short-biased trades if the stock fails to trigger that breakout, and then drops back below its 200-day moving average of $17.42 with high-volume. Target a drop down towards some near-term support at $16.39 or possibly to $14.50 if the bears hammer this lower post-earnings.

Additonal News: First Quarter On Track to Be Best in 14 Years

Additonal Views: Apple Is Not a Big Positive for Best Buy Earnings: Analyst

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Disclosures:

TheStreet’s editorial policy prohibits staff editors, reporters, and analysts from holding positions in any individual stocks. At the time of publication, no disclosure information was available for Roberto Pedone.

Disclaimer

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