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.
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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, here's a look at several stocks that could experience big short squeezes when they report earnings this week.
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Briggs & Stratton
My first earnings short-squeeze trade idea is Briggs & Stratton (BGG), which is set to release numbers on Wednesday after the market close. Wall Street analysts, on average, expect Briggs & Stratton to report revenue of $316.80 million on a loss of 38 cents per share.
The current short interest as a percentage of the float for Briggs & Stratton is extremely high at 20.9%. That means that out of the 43.89 million shares in the tradable float, 9.20 million shares are sold short by the bears. This is a large short interest on a stock with a relatively low tradable float. Any bullish earnings news could easily send shares of BGG sharply higher post-earnings as the bears rush to cover some of their bets.
From a technical perspective, BGG is currently trending below both its 50-day and 200-day moving averages, which is bearish. This stock has recently formed a double bottom chart pattern at $17.14 to $17.19 a share. Shares of BGG are now starting to bounce off those support levels and it's beginning to move within range of triggering a near-term breakout trade post-earnings.
If you're bullish on BGG, 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 at $18.26 to its 50-day moving average of $19.25 a share with high volume. Look for volume on that move that hits near or above its three-month average action of 390,078 shares. If that breakout begins post-earnings, then BGG will set up to re-test or possibly takeout its next major overhead resistance levels at $20.91 to $21.50, or even $22.70 to $24 a share.
I would simply avoid BGG 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 $17.14 a share with high volume. If we get that move, then BGG will set up to enter new 52-week-low territory, which is bearish technical price action. Some possible downside targets off that move are $15 to $14 a share.
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Cepheid
Another potential earnings short-squeeze play is molecular diagnostics player Cepheid (CPHD), which is set to release its numbers on Thursday after the market close. Wall Street analysts, on average, expect Cepheid to report revenue $110.04 million on a loss of 16 cents per share.
The current short interest as a percentage of the float for Cepheid is very high at 14.1%. That means that out of the 69.13 million shares in the tradable float, 9.77 million shares are sold short by the bears. The bears have also been increasing their bets from the last reporting period by 9.5%, or by 849,000 shares. If the bears get caught pressing their bets into a bullish quarter, then shares of CPHD could easily rip sharply higher post-earnings as the shorts move to cover some of their positions.
From a technical perspective, CPHD 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 right off its 50-day moving average of $41.61 a share. That spike is quickly pushing shares of CPHD within range of triggering a near-term breakout trade post-earnings.
If you're in the bull camp on CPHD, 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 $45.26 to its 200-day moving average of $46.95 a share with high volume. Look for volume on that move that registers near or above its three-month average volume of 680,294 shares. If that breakout hits post-earnings, then CPHD will set up to re-test or possibly take out its next major overhead resistance levels at $50.50 to its 52-week high at $55.89 a share.
I would simply avoid CPHD 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 $42.26 a share to its 50-day moving average of $41.61 a share with high volume. If we get that move, then CPHD will set up to re-test or possibly take out its next major support levels at $37.12 to its 52-week low of $36.81 a share. Any high-volume move below those levels will then give CPHD a chance to tag its next major support levels at around $35 to $32 a share.
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Athenahealth
Another potential earnings short-squeeze candidate is Athenahealth (ATHN), which is set to release numbers on Thursday after the market close. Wall Street analysts, on average, expect Athenahealth to report revenue of $190.37 million on earnings of 27 cents per share.
The current short interest as a percentage of the float for Athenahealth is extremely high at 21.9%. That means that out of the 37.36 million shares in the tradable float, 8.21 million shares are sold short by the bears. This is a very high short interest on a stock with a relatively low tradable float. If the bulls get the earnings news they're looking for, then shares of ATHN could easily explode sharply higher post-earnings as the bears rush to cover some of their trades.
From a technical perspective, ATHN 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 moving lower from its high of $146.34 to its recent low of $118.98 a share. During that downtrend, shares of ATHN have been making mostly lower highs and lower lows, which is bearish technical price action.
If you're bullish on ATHN, 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 $129.56 to its 50-day moving average of $132.63 a share with high volume. Look for volume on that move that registers near or above its three-month average action of 511,206 shares. If that breakout develops post-earnings, then ATHN will set up to re-test or possibly take out its next major overhead resistance levels at $136.97 to its 200-day moving average of $140.73 a share, or even $146 to $150 a share.
I would avoid ATHN or look for short-biased trades if after earnings it fails to trigger that breakout and then drops back below some key support levels at $118.98 to $117.62 a share with high volume. If we get that move, then ATHN will set up to re-test or possibly take out its next major support level at $110.73 to $105 a share.
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Las Vegas Sands
Another earnings short-squeeze prospect is casino player Las Vegas Sands (LVS), which is set to release numbers on Wednesday after the market close. Wall Street analysts, on average, expect Las Vegas Sands to report revenue of $3.70 billion on earnings of 86 cents per share.
The current short interest as a percentage of the float for Las Vegas Sands stands at 6%. That means that out of 397.13 million shares in the tradable float, 22.17 million shares are sold short by the bears. The bears have also been increasing their bets from the last reporting period by 4.9%, or by 1.03 million shares. If the bears get caught pressing their bets into a strong quarter, then shares of LVS could easily trend sharply higher post-earnings as the shorts rush to cover some of their positions.
From a technical perspective, LVS is currently trending below both its 50-day and 200-day moving averages, which is bearish. This stock has been downtrending over the last three months and change, with shares moving sharply lower from its high of $77.88 to its intraday low of $57.94 a share. During that downtrend, shares of LVS have been consistently making lower highs and lower lows, which is bearish technical price action.
If you're bullish on LVS, 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 its 50-day moving average of $64.04 a share and then above more key resistance levels at $64.38 to $64.60 a share with high volume. Look for volume on that move that hits near or above its three-month average action of 5.82 million shares. If that breakout materializes post-earnings, then LVS will set up to re-test or possibly take out its next major overhead resistance levels at $69 to its 200-day moving average of $73.32 a share.
I would simply avoid LVS or look for short-biased trades if after earnings it fails to trigger that breakout and then takes out its recent low of $57.94 a share with high volume. If we get that move, then LVS will set up to enter new 52-week-low territory, which is bearish technical price action. Some possible downside targets off that move are $50 to $45 a share.
Cohen & Steers
My final earnings short-squeeze play is global investment management player Cohen & Steers (CNS), which is set to release numbers on Wednesday after the market close. Wall Street analysts, on average, expect Cohen & Steers to report revenue of $80.80 million on earnings of 47 cents per share.
The current short interest as a percentage of the float for Cohen & Steers is very high at 13.8%. That means that out of the 19.28 million shares in the tradable float, 2.66 million shares are sold short by the bears. This is a large short interest on a stock with a very low tradable float. Any bullish earnings news could easily spark a big short-squeeze for shares of CNS post-earnings as the bears jump to cover some of their bets.
From a technical perspective, CNS 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 moving lower from its high of $44.14 to its recent low of $37.34 a share. During that downtrend, shares of CNS have been consistently making lower highs and lower lows, which is bearish technical price action.
If you're in the bull camp on CNS, then I would wait until after its report and look for long-biased trades if this stock manages to break out above both its 200-day moving average at $40 and its 50-day moving average at $41.26 a share with high volume. Look for volume on that move that registers near or above its three-month average action of 108,112 shares. If that breakout gets started post-earnings, then CNS will set up to re-test or possibly take out its next major overhead resistance levels at $43 to $44 a share, or even its 52-week high at $45.02 a share.
I would avoid CNS 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 $37.34 a share with high volume. If we get that move, then CNS will set up to re-test or possibly take out its next major support levels at $33.92 to $29.55 a share.
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To see more potential earnings short squeeze plays, check out the Earnings Short-Squeeze Plays portfolio on Stockpickr.
-- Written by Roberto Pedone in Delafield, Wis.
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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.
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