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.
Wolverine World Wide
My first earnings short-squeeze trade idea is apparel footwear and accessories player Wolverine World Wide (WWW), which is set to release numbers on Tuesday before the market open. Wall Street analysts, on average, expect Wolverine World Wide to report revenue of $608.50 million on earnings of 27 cents per share.
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Recently, Piper Jaffray said it believes Wolverine World Wide's 2014 revenue guidance of of a 3%-to-5% increase is too optimistic. It reiterated a neutral rating on the stock with a $25 per share price target.
The current short interest as a percentage of the float for Wolverine World Wide is pretty high at 10.5%. That means that out of the 98.49 million shares in the tradable float, 10.42 million shares are sold short by the bears. The bears have also been increasing their bets from the last reporting period by 1.7%, or by about 175,000 shares. If the bears get caught pressing their bets into a strong quarter, then shares of WWW could easily rip sharply higher post-earnings as the bears jump to cover some of their trades.
From a technical perspective, WWW is currently trending above its 50-day moving average and below its 200-day moving average, which is neutral trendwise. This stock has been consolidating and trending sideways for the last month and change, with shares moving between $25 on the downside and $27.17 on the upside. Shares of WWW are starting to spike higher off its 50-day at $26.22 and it's beginning to move within range of triggering a breakout trade post-earnings above the upper-end of its sideways trading chart pattern.
If you're bullish on WWW, 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 $27.11 to $27.17 a share with high volume. Look for volume on that move that hits near or above its three-month average volume of 796,389 shares. If that breakout hits, then WWW will set up to re-test or possibly take out its next major overhead resistance levels at its 200-day of $28.39 to $29.93 a share. Any high-volume move above those levels will then give WWW a chance to tag or take out its 52-week high at $34.10 a share.
I would simply avoid WWW 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 $25.66 to $25 a share high volume. If we get that move, then WWW will set up to enter new 52-week low territory below $25.06, which is bearish technical price action. Some possible downside targets off that move are $20 to $18 a share.
Cohen & Steers
Another potential earnings short-squeeze play is investment manager Cohen & Steers (CNS), which is set to release its numbers on Wednesday after the market close. Wall Street analysts, on average, expect Cohen & Steers to report revenue $77.73 million on earnings of 44 cents per share.
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The current short interest as a percentage of the float for Cohen & Steers is very high at 14.7%. That means that out of the 19.27 million shares in the tradable float, 3 million shares are sold short by the bears. This is a stock with a big short interest and a very low tradable float. Any bullish earnings news could easily spark a large short-squeeze post-earnings that forces the bears to cover some of their positions.
From a technical perspective, CNS is currently trending above both its 50-day and 200-day moving averages, which is bullish. This stock has been uptrending strong over the last six months, with shares moving higher from its low of $34.09 to its recent high of $45.02 a share. During that uptrend, shares of CNS have been consistently making higher lows and higher highs, which is bullish technical price action. That move has now pushed shares of CNS within range of triggering a big breakout trade post-earnings.
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 its 52-week high at $45.02 a share (or above Wednesday's intraday high if greater) with high volume. Look for volume on that move that hits near or above its three-month average action of 118,142 shares. If that breakout hits post-earnings, then CNS will set up to enter new 52-week-high territory, which is bullish technical price action. Some possible upside targets off that breakout are $55 to $60 a share.
I would simply avoid CNS or look for short-biased trades if after earnings it fails to trigger that breakout and then drops back below some near-term support at $41.92 a share and then below its 50-day moving average of $41.74 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 its 200-day moving average of $38.69 a share to $36 to $34 a share.
Cintas
Another potential earnings short-squeeze candidate is corporate identity uniforms and business services player Cintas (CTAS), which is set to release numbers on Tuesday after the market close. Wall Street analysts, on average, expect Cintas to report revenue of $1.17 billion on earnings of 75 cents per share.
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Last month, Jefferies increased its price target on Cintas to $70 per share and set a buy rating on the stock. The firm believes that improved rental end-market hiring can be boon to earnings for Cintas.
The current short interest as a percentage of the float for Cintas is notable at 6.2%. That means that out of the 100.27 million shares in the tradable float, 6.18 million shares are sold short by the bears. If the bulls get the earnings news they're looking for, then shares of CTAS could easily jump sharply higher post-earnings as the bears rush to cover some of their positions.
From a technical perspective, CTAS is currently trending above both its 50-day and 200-day moving averages, which is bullish. This stock has been uptrending strong over the last three months and change, with shares moving higher from its low of $55.65 to its recent high of $64.45 a share. During that uptrend, shares of CTAS have been making mostly higher lows and higher highs, which is bullish technical price action. Shares of CTAS are now quickly moving within range of triggering a big breakout trade post-earnings.
If you're bullish on CTAS, 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 $64.45 a share with high volume. Look for volume on that move that hits near or above its three-month average action of 493,756 shares. If that breakout materializes pos-earnings, then CTAS will set up to enter new 52-week-high territory, which is bullish technical price action. Some possible upside targets off that breakout are $75 to $80, or even $90 a share.
I would avoid CTAS or look for short-biased trades if after earnings it fails to trigger that breakout and then drops back below some near-term support at $62.22 a share to its 50-day moving average of $62.19 a share with high volume. If we get that move, then CTAS will set up to re-test or possibly take out its next major support levels at $59 to its 200-day moving average of $57.97 a share.
United Rentals
Another earnings short-squeeze prospect is equipment rental player United Rentals (URI), which is set to release numbers on Wednesday after the market close. Wall Street analysts, on average, expect United Rentals to report revenue of $1.36 billion on earnings of $1.46 per share.
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Just recently, KeyBanc increased its price target on United Rentals to $122 from $105. KeyBanc thinks the company will benefit from strong project activity in the Gulf Coast region. It has a buy rating on the stock.
The current short interest as a percentage of the float for United Rentals is notable at 6%. That means that out of the 96.36 million shares in the tradable float, 6.14 million shares are sold short by the bears. If this company can deliver the earnings news the bulls are looking for, then shares of URI could easily soar sharply higher post-earnings as the bears jump to cover some of their bets.
From a technical perspective, URI 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 six months, with shares soaring higher from its low of $74.32 a share to its intraday high of $109.53 a share. During that uptrend, shares of URI have been consistently making higher lows and higher highs, which is bullish technical price action.
If you're bullish on URI, then I would wait until after its report and look for long-biased trades if this stock manages to break out into new 52-week-high territory above $109.53 (or above Wednesday's intraday high if greater) with strong volume. Look for volume on that move that hits near or above its three-month average action of 1.56 million shares. If that breakout hits, then URI will set up to enter new 52-week-high territory, which is bullish technical price action. Some possible upside targets off that breakout are $125 to $135, or even $140 a share.
I would simply avoid URI 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 $105 to its 50-day at $102.13 and then below more near-term support levels at $101.80 to $100 a share with high volume. If we get that move, then URI will set up to re-test or possibly take out its next major support levels at $95 to $91, or even $88 a share.
SanDisk
My final earnings short-squeeze play is data storage devices player SanDisk (SNDK), which is set to release numbers on Wednesday after the market close. Wall Street analysts, on average, expect SanDisk to report revenue of $1.60 billion on earnings of $1.39 per share.
Just this morning, Stifel raised its price target on SanDisk to $114 from $95. Stifel expects the company's June quarter results to beat consensus estimates and predicts that SanDisk's guidance for its September quarter may also beat expectations. Stifel maintained its buy rating on the stock.
The current short interest as a percentage of the float for SanDisk stands at 7%. That means that out of the 225.38 million shares in the tradable float, 16.28 million shares are sold short by the bears. If this company can deliver the earnings numbers the bulls are looking for, then shares of SNDK could easily trend sharply higher post-earnings as the bears rush to cover some of their bets.
From a technical perspective, SNDK 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 six months, with shares moving higher from its low of $66.62 to its recent high of $106.93 a share. During that uptrend, shares of SNDK have been making mostly higher lows and higher highs, which is bullish technical price action. That move has now pushed shares of SNDK within range of triggering a major breakout trade post-earnings that could push the stock into new 52-week-high territory.
If you're in the bull camp on SNDK, 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 $106.93 a share (or above Wednesday's intraday high if greater) with high volume. Look for volume on that move that hits near or above its three-month average volume of 3.29 million shares. If that breakout gets underway post-earnings, then SNDK will set up to enter new 52-week-high territory, which is bullish technical price action. Some possible upside targets off that breakout are $120 to $130, or even $135 a share.
I would avoid SNDK 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 $102.50 to $101.70 a share with high volume. If we get that move, then SNDK will set up to re-test or possibly take out its next major support levels at its 50-day moving average of $97.66 to $95 a share. Any high-volume move below those levels will then give SNDK a chance to tag $90 to $87 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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