Earnings reports have the power to create big volatility in stocks, particularly when bullish numbers are reported for a stock that's heavily shorted. That fuel can ignite a large short squeeze in any equity. Short-sellers rush to cover their positions to avoid huge losses as investors react to the news and snap up the stock.
You only need to find a couple of these candidates in a year to enhance your returns—the gains become so outsized in such a short timeframe that your profits add up quickly.
Don't forget that these stocks are heavily shorted for a reason, so you have to use trading discipline and sound money management when playing earnings short-squeeze candidates. Manage your risk accordingly. Sometimes it's best to wait for the stock to break out, letting the trend emerge after the market has digested all of the news.
However, sometimes the stock is going to be in such high demand that you will miss a lot of the move. That's when it's only worth betting prior to the report if you have a very strong conviction that the stock is going to explode higher.
Here's a look at a number of stocks that could experience big short squeezes when they report earnings this week.
One stock with the potential to see an earnings short-squeeze is PVH Corp , which is set to release results on Tuesday after the market close. This company designs and markets branded dress shirts, neckwear, sportswear, footwear, and other related products worldwide. Wall Street analysts, on average, expect PVH to report revenues of $1.28 billion on earnings of 95 cents per share.
This company is on deck to potentially beat Wall Street estimates for the fifth consecutive quarter. If they do continue with that trend and also raise their guidance, then this stock could potentially make a large move post-earnings to the upside.
Barclays recently issued a note where they maintained their overweight rating and price target of $80 a share on this stock. A Barclays analyst said they expect revenue of $1.28 billion, representing top-line growth of 16.4 percent over the same period last year. They see a strong revenue increase of 25.8 percent and 10.1 percent for the Tommy Hilfiger and Calvin Klein brands.
The current short interest as a percentage of the float for PVH sits at around 4.2 percent. That means that out of the 60.20 million shares in the tradable float, 2.58 million are sold short by the bears.
This isn't a huge short interest, but it's enough to spark a sharp rally if PVH can report a strong quarter and guide higher.
From a technical standpoint, this stock is trading below its 50-day moving average but above its 200-day moving average, which is neutral trendwise. The stock recently fell from a July high of $75.86 a share to a recent low of $51.15 a share. Since that low, the stock has rebounded sharply back up towards $64 a share.
I would only be a buyer of this stock after they report if it trades above its 50-day moving average of $66.09 on strong volume. Look for volume the following day that's on track to be near or greater than its three-month average action of 1.2 million shares. I would target a run back towards $73 or possible the 52-week high of $75.86 a share if the bulls win the battle post-earnings.
I would only short this stock if it drops below $60 a share after they report their results on strong volume. I would add to any short position if it then drops below $56 a share, and I would target a drop back towards that big previous support zone at $51 a share. One way to confirm that this stock is going to drop post-earnings is if it fails to clear the 50-day and then drops on big volume through its 200-day moving average of $64.34 a share.
If you're looking for an earnings short-squeeze play in the financial services sector, then take a look at First Marblehead, which is set to release numbers on Tuesday after the market close.
This company, together with its subsidiaries, provides outsourcing services for designing and implementing private education loan programs to national and regional financial institutions, and educational institutions in the U.S. Wall Street analysts, on average, expect First Marblehead to report revenues of $13.60 million.
This is a low-priced stock that could bounce sharply if the company can report a decent quarter and guide higher. I like this name for a post-earnings short-squeeze trade since the stock is starting to show some signs of strength if it can manage to trade above its 50-day moving average of $1.56 after they report. The stock is also looking strong today with shares up over 10 percent ahead of the quarter.
The current short interest as a percentage of the float for First Marblehead is 6.6 percent. That means that out of the 55.37 million shares in the tradable float, 4.27 million are sold short by the bears.
From a technical standpoint, the stock is currently trading below its 50-day and 200-day moving averages, which is bearish. Since March, this stock has slide all the way down to a low of $1.18 a share from a high of $2.54 a share. The stock has recently found some buying support at around $120 a share and is now very close to moving above its 50-day moving average.
The way I would pay this stock is to buy it after they report if it trades above its 50-day moving average of $1.56 a share on strong volume. Look for volume the following day that's tracking in at close to or greater than its three-month average volume of 252,000 shares.
I would add to any long position once the stock then trades above $1.70 a share and target a run back towards it 200-day moving average of $1.95 a share or possibly higher if the bulls can spark a big short-squeeze.
One final earnings short-squeeze play isVera Bradley
, set to release numbers on Tuesday after the market close. This is a designer, producer, marketer and retailer of accessories for women. The products include offering of handbags, accessories and travel and leisure items. Wall Street analysts, on average, expect Vera Bradley to report revenues of $96.82 million.
I like this stock for a post-earnings short-squeeze play because the bears have cleaned up on this name recently in a big way. This stock has dropped dramatically from its May high of $52.35 a share to its current low of $24.83 a share. That huge drop could be setting up this stock for a sharp rebound if the bulls hear what they're looking for.
The current short interest as a percentage of the float for Vera Bradley is an extremely large 29.5 percent. That means that out of the 19.74 million shares in the tradable float, 5.83 million are sold short by the bears. It's worth pointing out that the bears have been increasing their bets from the last reporting period by 10.5 percent, or by around 554,000 million shares. If the bears are pressing too much ahead of this quarter, then this stock could easily see a big short-squeeze.
From a technical standpoint, the stock is currently trading significantly below both its 50-day and 200-day moving averages, which is bearish. That said, the stock just found some buying support at around $25 a share and has since bounced up towards its current price of around $29 a share.
I would look to be a buyer of this stock after they report if it trades above $30 to $31.56 a share on strong volume. Look for volume the following day that's tracking in close to or greater than its three-month average action of 582,000 shares. I would target a run back towards $35 a share (50-day) or possible $38 a share (200-day) if the bulls gain full control of this stock post-earnings.
I would only short this name if it drops below $25 a share on big volume after the company reports its results. I would add to any bearish bets if it then drops below $22.50 a share and ride this stock down with the short-sellers.
To see more potential earnings short squeeze candidates like LDK Solar , DSW and Gordmans Stores , check out the Earnings Short Squeeze Plays portfolio on Stockpickr.
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