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3 Earnings Short-Squeeze Opportunities - 11443 views
This is exactly what happened with market leader Baidu.com (BIDU), the Chinese-language Internet search provider. On Monday night, Baidu reported fourth-quarter net income of 50 cents a share, which topped Wall Street forecasts of 45 cents a share. Revenue came in at $371.3 million, compared with the $360.3 million estimate. Baidu also issued very bullish guidance, saying that it anticipated a robust spending environment by online advertisers. This news has sent the stock up like a rocket ship, with shares up more than 9%, or about $10 a share.
One of the main reasons the stock is taking off is that the bears were pressing their bets going into the quarter. As of Jan. 14, the total number of shares sold short on Baidu sat at around 8.8 million. That’s an increase of 13%, or close to 1 million shares, over the previous reporting period, which showed the total number of shares sold short at around 7.8 million.
Make no mistake about it: Those bears who pressed their bets going into the quarter are now getting squeezed out of their trade due to Baidu’s strong results. This is exactly why I love to find stocks that are leading the market and that are heavily shorted going into their earnings report. These types of situations are exactly what can produce huge returns if everything plays out right.
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Before we take a look at some potential earnings short-squeeze trades, let’s go over what a short squeeze is exactly. A short squeeze is a rapid increase in the price of a stock that occurs when there is a lack of supply and an excess of demand for the stock. Short squeezes happen when bears who’ve sold the stock short are forced to cover their position on a stock as it rises. Short-sellers will cover their positions to avoid losses further losses.
Here's a look at a number of stocks that could experience a big short squeeze when they report earnings.
My first idea for an earnings short squeeze trade is Entropic Communications (ENTR), which is scheduled to report its results on Wednesday after the market close. Entropic is a semiconductor company that designs, develops and markets systems solutions to enable connected home entertainment. The stock is off to a slow start in 2011 with shares off around 8.7%, but this name has been a clear market leader for the past year with shares up around 220%. Wall Street analysts are looking for Entropic to report revenues in a range of $63 million to $69.35 million.
A lot of investors don’t really know about Entropic since the stock seems to fly under the radar, despite being one of the strongest acting names. However, this stock is a highflier, and the company recently introduced the next generation of wired and wireless connectivity technologies that was well-received at the Consumer Electronics Show. At CES, Entropic unveiled its next generation MoCA 2.0 silicon technology that is expected to be the back-bone for next generation service and content delivery by major service providers. A JPMorgan analyst said that Entropic will be a major beneficiary due to their MoCA 2.0 technology.
This clear technological advantage for Entropic should help the company thrive for many quarters to come and it could mean that the current quarter is going to be a good one. As of Jan. 14, the current short interest as a percentage of the float for ENTR is a whopping 31.8%. What’s even more interesting here is that the shorts have actually increased their bets from the last reporting period by around 1 million shares, from 22 million to now 23 million shares sold short.
From a technical standpoint, this stock has been in a nasty slide during the past month with shares falling from around $14 to its current price close to $11 a share. Traders should now watch for the stock to get back above the 50-day moving average of $11.39 prior to its earnings report. If the stock can get above that key technical level, and if it can trade above some overhead resistance at around $12 a share, then this name could setup to experience a huge short squeeze.
As of the most-recent reporting period, Entropic shows up as a holding in the portfolio of Tudor Investment, managed by Paul Tudor Jones. Fortune named the stock one of its 10 best stocks for 2011, and it was one of 10 small-caps that tripled in 2010.
Another potential earnings short squeeze trade is Las Vegas Sands (LVS), which is due to report its results on Thursday. This company, together with its subsidiaries, develops multi-use integrated resorts worldwide, including resorts in China’s red-hot Macau district. So far in 2011, the stock is off to a decent start with shares up close to 5%. Wall Street analysts are looking for revenues to come in between a range of $1.98 billion and $2.22 billion.
The question here for market players is whether the Las Vegas economy has started to recover, and even more important, whtehter Macau gaming revenues are still tracking strong. Macau gaming revenue hit record levels in 2010, so I see no reason to believe that Las Vegas Sands isn’t still benefiting from the robust spending by Chinese consumers on their gambling habits. Keep in mind, that Las Vegas sands brings in around 75% of its earnings from outside of the U.S., in such places like Macau and Singapore. Even a modest rebound in Las Vegas combined with likely bullish numbers from abroad should send the shorts scrambling on this stock.
As of Jan. 14, the current short interest as a percentage of the float for Las Vegas Sands stands at around 6.2%. That means that out of the 340 million shares in the tradable float around 21.11 million are currently sold short by the bears. This isn’t a huge short position, but it’s big enough to spark a decent short squeeze if Las Vegas Sands and report strong numbers and issue bullish guidance.
From a technical standpoint, shares of Las Vegas Sands have just started to trade back above its 50-day moving average of $47.22. Market players should now watch for the stock to trade above some past overhead resistance at around $51 and $52 a share. You could buy the stock now and place a stop right below that 50-day moving average, then look for confirmation of an earnings short squeeze if the stock can get above those prior resistance levels I mentioned above.
Las Vegas Sands is a holding of Louis Navellier at Navellier & Associates, as of the latest reporting period, and it was one of three five-star stocks for 2011 from Nainesh Shah, portfolio manager for the five-star Roosevelt Multi Cap fund.
One final stock that could be setting up for a big earnings short squeeze is Travelzoo (TZOO), which is set to report its results on Thursday before the market opens. This global Internet media firm informs over 20 million subscribers worldwide, as well as millions of website users, about the best travel and entertainment deals available from thousands of companies. This stock is off to roaring start in 2011 with shares already up around 18%. Wall Street analysts are looking for revenue in a range of $28.2 million to $28.83 million.
I think there’s a very strong chance that Travelzoo is going to beat for the current quarter and issue very positive guidance. The company is one of the market leaders in offering consumers deals via the Internet (think the Groupon of travel). Consumers are looking for ways to save money when they travel or go out for entertainment, and that’s where Travelzoo comes in.
Just take a look at the numbers that Travelzoo just reported for signups to its UK publications. The company said that over 100,000 people signed up for the publications in the first 27 days of January, which marks the fastest audience growth that Travelzoo UK has ever seen. No matter how slow the economy is, people are always going to want to travel and spend money on entertainment. Travelzoo is the go-to company for finding consumers great deals on just that.
As of Jan. 14, the current short interest as a percentage of the float for TZOO is a rather large 21.3%. That means that out of the 5.4 million shares in the tradable float around 1.17 million shares are currently sold short by the bears. This is an extremely small float with a large short interest, and that’s exactly the type of situation that can produce a massive short squeeze.
From a technical standpoint, shares of Travelzoo are very close to breaking out if the stock can manage to trade above some past overhead resistance at around $53 a share. With the stock currently trading at around $49 a share, that breakout is only a few points away. If this stock does breakout either before or after they announce earnings, then I think this stock will see a big short squeeze that could send shares significantly higher.
To see more potential earnings short squeeze candidates, check out the Earnings Short Squeeze Plays portfolio on Stockpickr.
-- Written by Roberto Pedone in Winderemere, Fla.
At the time of publication, author had no positions in stocks mentioned.
Roberto Pedone, based out of Windermere, Fla., is an independent trader who focuses on stocks, options, futures, commodities and currencies. He is also an outside contributor to Beconequity.com and maintains the website Maddmoney.net, which he sold to Blue Wave Advisors in 2008. Roberto studied International Business at The Milwaukee School of Engineering, and he spent a year overseas studying business in Lubeck, Germany.