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.
Tesla Motors
My first earnings short-squeeze trade idea is electric car maker Tesla Motors (TSLA), which is set to release numbers on Tuesday after the market close. Wall Street analysts, on average, expect Tesla Motors to report revenue of $534.54 million on earnings of 11 cents per share.
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Just recently, Craig Irwin of Wedbush Securities upgraded shares of Tesla to outperform from neutral and raised his price target to $240 from $180 per share. "Tesla's not positioned to disappoint anytime soon. These guys are going to keep executing, keep making expectations for the foreseeable future," he said on CNBC's "Fast Money."
The current short interest as a percentage of the float Tesla Motors is extremely high at 26.1%. That means that out of the 77.88 million shares in the tradable float, 20.81 million shares are sold short by the bears. If the bulls get the earnings news they're looking for, then shares of TSLA could easily explode to the upside post-earnings as the bears rush to cover some of their bets.
From a technical perspective, TSLA is currently trending above both its 50-day and 200-day moving averages, which is bullish. This stock has been uptrending for the last few weeks, with shares moving higher from its low of $153 to its intraday high of $181.43 a share. During that move, shares of TSLA have been making mostly higher lows and higher highs, which is bullish technical price action.
If you're bullish on TSLA, then I would wait until after its report and look for long-biased trades if this stock manages to take out Tuesday's high of $181.43 to some more key overhead resistance at $185 a share with high volume. Look for volume on that move that hits near or above its three-month average action of 10.73 million shares. If we get that move, then TSLA will set up to re-test or possibly take out its next major overhead resistance levels at $188.79 to its all-time high at $194.50 a share. Any high-volume move above those levels will then give TSLA a chance to trend north of $200 a share.
I would simply avoid TSLA 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 at $173.53 (or below Tuesday's intraday low if lower) with high volume. If we get that move, then TSLA will set up to re-test or possibly take out its next major support areas at $160 to $153 a share. Any high-volume move below $153 will then give TSLA a chance to trend well below $150 a share.
Radian Group
Another potential earnings short-squeeze play is residential mortgage insurance player Radian Group (RDN), which is set to release its numbers on Thursday before the market open. Wall Street analysts, on average, expect Radian Group to report revenue of $211 million on a loss of 10 cents per share.
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This company recently reported that mortgage insurance delinquencies for September fell to 65,239 loans at the end of the month from 65,427 beginning primary delinquent inventory of loans. The company also reported $3.83 billion of primary new insurance was written in September.
The current short interest as a percentage of the float for Radian Group is extremely high at 25.8%. That means that out of the 160.34 million shares in the tradable float, 44.26 million shares are sold short by the bears. If the bulls get the earnings news they're looking for, then shares of RDN could easily rip sharply higher post-earnings as the shorts jump to cover some of their bets.
From a technical perspective, RDN is currently trending above both its 50-day and 200-day moving averages, which is bullish. This stock has been uptrending for the last two months, with shares moving higher from its low of $12.42 to its recent high of $15.15 a share. During that uptrend, shares of RDN have been mostly making higher lows and higher highs, which is bullish technical price action. That move has now pushed shares of RDN within range of triggering a major breakout trade post-earnings.
If you're in the bull camp on RDN, then I would wait until after its report and look for long-biased trades if this stock manages to break out above its 52-week high at $15.15 a share (or Wednesday's intraday high if higher) on high volume. Look for volume on that move that hits near or above its three-month average action of 4.15 million shares. If that breakout hits, then RDN will set up to enter new 52-week-high territory, which is bullish technical price action. Some possible upside targets off that breakout are $18 to $20, or even $22 a share.
I would simply avoid RDN or look for short-biased trades if after earnings it fails to trigger that breakout, and then drops below some key near-term support levels at $14.23 a share to its 50-day moving average of $13.91 a share with high volume. If we get that move, then RDN will set up to re-test or possibly take out its next major support levels at $12.95 to $12.50 a share, or even its 200-day moving average of $11.91 a share.
Ubiquiti Networks
Another potential earnings short-squeeze candidate is broadband wireless solutions provider Ubiquiti Networks (UBNT), which is set to release numbers on Thursday after the market close. Wall Street analysts, on average, expect Ubiquiti Networks to report revenue of $119.30 million on earnings of 40 cents per share.
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The current short interest as a percentage of the float for Ubiquiti Networks is pretty high at 10.7%. That means that out of the 24.78 million shares in the tradable float, 2.09 million shares are sold short by the bears. The bears have also been increasing their bets from the last reporting period by 70.1%, or by about 859,000 shares. If the bears get caught pressing their bets into a bullish quarter, then shares of UBNT could experience a big short squeeze post-earnings as the shorts rush to cover some of their bets.
From a technical perspective, UBNT is currently trending above both its 50-day and 200-day moving averages, which is bullish. This stock has been uptrending strong for the last three months, with shares moving higher from its low of $27.50 to its recent high of $43.99 a share. During that uptrend, shares of UBNT have been consistently making higher lows and higher highs, which is bullish technical price action. That move has now pushed shares of UBNT within range of triggering a big breakout trade post-earnings.
If you're bullish on UBNT, 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 $39.82 to its all-time high at $43.99 a share with high volume. Look for volume on that move that hits near or above its three-month average action of 782,837 shares. If that breakout hits, then UBNT will set up to enter new all-time high territory, which is bullish technical price action. Some possible upside targets off that breakout are $50 to $60 a share.
I would avoid UBNT 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 $36.74 a share to its 50-day moving average at $35.71 a share with high volume. If we get that move, then UBNT will set up to re-test or possibly take out its next major support levels at $33 to $30 a share.
Annie's
Another earnings short-squeeze prospect is natural and organic food player Annie's (BNNY), which is set to release numbers on Thursday after the market close. Wall Street analysts, on average, expect Annie's to report revenue of $57.12 million on earnings of 29 cents per share.
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The current short interest as a percentage of the float for Annie's is extremely high at 27.3%. That means that out of the 14.35 million shares in the tradable float, 3.73 million shares are sold short by the bears. The bears have also been increasing their bets from the last reporting period by 5.6%, or by about 198,000 shares. If the bears get caught pressing their bets into a strong quarter, then shares of BNNY could rip sharply higher post-earnings as the bears rush to cover some of their short positions.
From a technical perspective, BNNY is currently trending above both its 50-day and 200-day moving averages, which is bullish. This stock recently formed a double bottom chart pattern at $46.27 to $46.74 a share. Following that bottom, shares of BNNY have started to trend back above its 50-day moving average, and it's quickly pushing within range of triggering a big breakout trade.
If you're bullish on BNNY, 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 $49.89 a share to its all-time high at $52.38 a share with high volume. Look for volume on that move that hits near or above its three-month average action of 211,715 shares. If that breakout hits, then BNNY will set up to enter new all-time high territory, which is bullish technical price action. Some possible upside targets off that breakout are $60 to $70 a share.
I would simply avoid BNNY 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 at $48.03 a share to more support at $46.74 to $46.27 a share with high volume. If we get that move, then BNNY will set up to re-test or possibly take out its next major support levels at $42 to $40 a share.
U.S. Silica
My final earnings short-squeeze play is silica sand supplier U.S. Silica (SLCA), which is set to release numbers on Wednesday after the market close. Wall Street analysts, on average, expect U.S. Silica to report revenue of $141.28 million on earnings of 41 cents per share.
The current short interest as a percentage of the float for U.S. Silica is extremely high at 37.4%. That means that out of the 35.45 million shares in the tradable float, 13.25 million shares are sold short by the bears. If this company can deliver the earnings news the bulls are looking for, then shares of SLCA could experience a large short-squeeze post-earnings.
From a technical perspective, SLCA is currently trending above both its 50-day and 200-day moving averages, which is bullish. This stock has been uptrending strong for the last five months, with shares soaring higher from its low of $19.16 to its recent high of $37.14 a share. During that uptrend, shares of SLCA have been consistently making higher lows and higher highs, which is bullish technical price action. That move has now pushed shares of SLCA within range of triggering a big breakout trade post-earnings.
If you're in the bull camp on SLCA, then I would wait until after its report and look for long-biased trades if this stock manages to break out above its all-time high at $37.14 a share (or Wednesday's intraday high if higher) with high volume. Look for volume on that move that hits near or above its three-month average volume of 1.28 million shares. If that breakout hits, then SLCA will set up to enter new all-time high territory, which is bullish technical price action. Some possible upside targets off that breakout are $50 to $55 a share.
I would avoid SLCA 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 $34 to $33 a share with high volume. If we get that move, then SLCA will set up to re-test or possibly take out its next major support levels at $31.66 to $30.63 a share, or even its 50-day moving average of $28.28 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.
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