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 The Street doesn't like the numbers or guidance.
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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.
InvenSense
My first earnings short-squeeze trade idea is semiconductor player InvenSense (INVN), which is set to release numbers on Thursday after the market close. Wall Street analysts, on average, expect InvenSense to report revenue of $57.42 million on earnings of 10 cents per share.
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Just recently, Pacific Crest increased its price target on InvenSense to $27 from $20, as the firm believes the launch of the iWatch and iPhone 6 by Apple (AAPL) could enable InvenSense to finally obtain a deal from the tech giant. The firm reiterated its outperform rating on the stock.
The current short interest as a percentage of the float for InvenSense is extremely high at 35%. That means that out of the 73.41 million shares in the tradable float, 24.97 million shares are sold short by the bears. The bears have also been increasing their bets from the last reporting period by 3.9%, or by about 963,000 shares. If the bears get caught pressing their bets into a bullish quarter, then shares of INVN could easily rip sharply higher post-earnings as the bears jump to cover some of their positions.
From a technical perspective, INVN is currently trending above its 200-day moving average and just below its 50-day moving average, which is neutral trendwise. This stock recently formed a triple bottom chart pattern at $20.10, $20.19 and $20.08 a share. Following that bottom, shares of INVN are now starting to spike higher and move within range of triggering a major breakout trade post-earnings.
If you're bullish on INVN, 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 $22.50 to its all-time high at $24.34 a share with high volume. Look for volume on that move that hits near or above its three-month average volume of 2.67 million shares. If that breakout starts post-earnings, then INVN will set up to enter new all-time-high territory, which is bullish technical price action. Some possible upside targets off that breakout are $30 to $35 a share.
I would simply avoid INVN 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 $20.08 to its 200-day moving average of $18.96 a share high volume. If we get that move, then INVN will set up to re-test or possibly take out its next major support levels at $17.76 to $16 a share.
Energy XXI
Another potential earnings short-squeeze play is oil and gas exploration player Energy XXI (EXXI), which is set to release its numbers on Thursday before the market open. Wall Street analysts, on average, expect Energy XXI to report revenue $285.80 million on earnings of 31 cents per share.
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The current short interest as a percentage of the float for Energy XXI is extremely high at 28%. That means that out of the 61.58 million shares in the tradable float, 17.37 million shares are sold short by the bears. The bears have also been increasing their bets from the last reporting period by 14.9%, or by about 2.24 million shares. If the bears get caught pressing their bets into a strong quarter, then shares of EXXI could easily soar sharply higher post-earnings as the bears rush to cover some of their bets.
From a technical perspective, EXXI is currently trending above its 50-day moving average and below its 200-day moving average, which is neutral trendwise. This stock has been trending sideways and consolidating for the last three months, with shares moving between $21.32 on the downside and $24.59 on the upside. Shares of EXXI are now starting to bounce off its 50-day moving average and it's quickly moving within range of triggering a near-term breakout trade above the upper-end of its sideways trading chart pattern.
If you're in the bull camp on EXXI, 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 $24.26 to $24.59 a share with high volume. Look for volume on that move that hits near or above its three-month average action of 2.18 million shares. If that breakout hits, then EXXI will set up to re-test or possibly take out its next major overhead resistance levels at $27.66 to $28.50 a share. Any high-volume move above those levels will then give EXXI a chance tag $30 to $32 a share.
I would simply avoid EXXI 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 $23.34 a share with high volume. If we get that move, then EXXI will set up to re-test or possibly take out its next major support levels at $22.07 to its 52-week low of $20.40 a share. Any move below $20.40 will then push shares of EXXI into new 52-week-low territory, which is bearish technical price action.
Weight Watchers
Another potential earnings short-squeeze candidate is global-branded consumer weight management services provider Weight Watchers (WTW), which is set to release numbers on Wednesday after the market close. Wall Street analysts, on average, expect Weight Watchers to report revenue of $399.20 million on earnings of 9 cents per share.
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The current short interest as a percentage of the float for Weight Watchers is extremely high a 38%. That means that out of the 27.55 million shares in the tradable float, 10.77 million shares are sold short by the bears. This is a stock with a monster short interest and a very low tradable float. Any bullish earnings news could easily send shares of WTW soaring higher post-earnings as the bears rush to cover some of their positions.
From a technical perspective, WTW is currently trending above its 50-day moving average and well below its 200-day moving average, which is neutral trendwise. This stock has been trending sideways and consolidating for the last two months and change, with shares moving between $19.50 on the downside and $22.16 on the upside. Any high-volume move above the upper-end of its recent sideways trading chart pattern could trigger a major breakout trade for shares of WTW post-earnings.
If you're bullish on WTW, 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 $21.64 to $22.16 a share and then once it takes out its gap-down-day high of $23.18 a share with high volume. Look for volume on that move that hits near or above its three-month average action of 1.25 million shares. If that breakout materializes after earnings, then WTW will set up to re-fill some of its previous gap-down-day zone from February that started at $31.40 a share.
I would avoid WTW or look for short-biased trades if after earnings it fails to trigger that breakout and then drops back below some near-term support levels at $20.27 to its 52-week low of $19.50 a share with high volume. If we get that move, then WTW will set up to enter new 52-week-low territory, which is bearish technical price action.
Outerwall
Another earnings short-squeeze prospect is automated retail solutions provider Outerwall (OUTR), which is set to release numbers on Thursday after the market close. Wall Street analysts, on average, expect Outerwall to report revenue of $586.65 million on earnings of 95 cents per share.
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Just recently, Wedbush Securities wrote in a note to investors that they're maintaining their outperform rating on OUTR and a 12-month price target of $82 per share. That price target reflects just over 11 times their 2014 EPS estimate of $7.34, which is a discount to its historical valuation and reflects recent rental demand declines and uneven profitability.
The current short interest as a percentage of the float for Outerwall is extremely high at 34%. That means that out of the 19.35 million shares in the tradable float, 8.06 million shares are sold short by the bears. This is a stock that currently sports a gigantic short interest and an extremely low tradable float. If the bulls get the earnings news they're looking for, then shares of OUTR could explode to the upside as the bears rush to cover some of their bets.
From a technical perspective, OUTR is currently trending below its 50-day moving average and above its 200-day moving average, which is neutral trendwise. This stock recently pulled back to its 200-day moving average, and subsequently has rebounded in a V-shaped pattern back to around its 50-day moving average. This move is starting to push shares of OUTR within range of triggering a major breakout trade post-earnings.
If you're bullish on OUTR, 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 $72 to $73.25 a share and then once it clears its 52-week high at $74.30 a share with strong volume. Look for volume on that move that hits near or above its three-month average action of 916,340 shares. If that breakout gets underway post-earnings, then OUTR will set up to enter new 52-week-high territory, which is bullish technical price action. Some possible upside targets off breakout are $85 to $90 a share, or even $95 a share.
I would simply avoid OUTR 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 $67 to $66 a share with high volume. If we get that move, then OUTR will set up to re-test or possibly take out its next major support levels at its 200-day moving average of $64.60 to $62.60 a share. Any high-volume move below those levels will then give OUTR a chance to tag $57 to $55 a share.
Blucora
My final earnings short-squeeze play is online solutions provider Blucora (BCOR), which is set to release numbers on Thursday after the market close. Wall Street analysts, on average, expect Blucora to report revenue of $216.98 million on earnings of $1.03 per share.
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The current short interest as a percentage of the float for Blucora is very high at 17.8%. That means that out of the 40.09 million shares in the tradable float, 7.10 million shares are sold short by the bears. This stock sports a large short interest with a relatively low tradable float. If this company can deliver the earnings news the bulls are looking for, then shares of BCOR could easily rip sharply higher post-earnings as the bears rush to cover some of their bets.
From a technical perspective, BCOR is currently trending below both its 50-day and 200-day moving averages, which is bearish. This stock has been consolidating and trending sideways for the last two months, with shares moving between $18.06 on the downside and $20.65 on the upside. Any high-volume move above the upper-end of its recent sideways trading pattern post-earnings could easily push shares of BCOR into breakout territory.
If you're in the bull camp on BCOR, 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 $19.60 to $19.90 a share and then once it takes out more resistance at $20.65 a share with high volume. Look for volume on that move that hits near or above its three-month average volume of 894,050 shares. If that breakout triggers after earnings, then BCOR will set up to re-test or possibly take out its next major overhead resistance levels at $22.11 to its 200-day moving average of $23.36 a share. Any high-volume move above those levels will then give BCOR a chance to tag $25 to $26 a share.
I would avoid BCOR 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 $18.30 to $18.06 a share with high volume. If we get that move, then BOCR will set up to re-test or possibly take out its 52-week low at $14.52 a share.
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.