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3 Earnings Short-Squeeze Stocks - 10439 views
BALTIMORE (Stockpickr) -- As we move through the earnings season, I love to search the market for stocks that look poised for an earnings short squeeze. These stocks can produce outsized gains due to the fact that they’re heavily shorted by the bears. They also hold a lot of risk; after all, the bears have found some reason to think that they’ll trade much lower.
Last week, the bears won the battle on two of my picks, with First Solar (FSLR) and InterDigital (IDCC) trading sharply lower following their earnings reports. My only winner was Brigham Exploration (BEXP), which I mentioned at around $33 a share and is now changing hands at around $37.
Neither FSLR nor IDCC delivered the fundamental results that the bulls were looking for, so the bears subsequently gained control and whacked both stocks. This is simply part of the game when trading earnings short-squeeze candidates, and it's what makes it important to cut the losers quick if a short squeeze doesn’t materialize. Don’t ever let an earnings short-squeeze trade turn into an investment if your play was only to trade the earnings event. There are enough heavily shorted stock candidates that will produce large gains and easily take care of the losers.
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Remember, the winners tend to advance significantly, so they make this trading strategy worth the risk as long as you cut the losers fast. This is a game of probability, so it’s important to realize that it’s virtually impossible that every name I highlight is going to be a winner. However, I will continue to strive to pick the best names that I think have the greatest chance of producing an earnings short squeeze if the companies deliver the fundamental results that Wall Street is looking for.
Before we take a look at some potential earnings short-squeeze candidates, let’s go over the basics. 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 this week.
My first idea for an earnings short squeeze play is Sina (SINA), which is scheduled to report its results on Tuesday after the market close. This company provides online media and mobile value-added services in the People’s Republic of China. This stock is off to a strong start in 2011 with shares up around 17%. Wall Street analysts are expecting the company to to report revenue in a range of $103.90 million to $105.18 million and earnings per shares of 37 cents to 49 cents.
This company is what I like to call the Chinese play on social networking. Sina owns and operates a popular social networking microblogging Web site called Weibo. The site is often referred to as a hybrid of Twitter and Facebook and is reported to have well over 50 million users. Some Wall Street analysts have expressed concerns that China could start to clamp down on Twitter-like communication services due to some recent demonstrations in the Far East.
That might very well happen in the future, but the stock has already started to discount some of that news, with shares recently trading off from $95 a share to its recent low of $75 a share. My take here is that the bears have probably started to short the stock more aggressively off of this potential crackdown on Internet communications in China. That strategy might be setting up to backfire though since I believe the current quarter should be a strong one driven by the rapid growth with Weibo. In fact, I think the current quarter could produce an earnings blowout for the bulls.
The current short interest as a percentage of the float for SINA sits at around 10.7%. That means that out of the 61 million shares that are available for trading, 5.95 million shares are currently sold short by the bears as of Feb. 15. The shorts have also increased their bets by around 2% from the last reporting period. This sets the stock up nicely for a short squeeze since the tradable float is extremely low.
From a technical standpoint, I would like to see SINA trending higher into its earnings report, and it would be ideal for the stock to stay above its 50-day moving average of $80.88 a share. As long as the stock doesn’t sell off hard before the earnings report on volume above the three-month average trading volume of 2.2 million shares, then I think we have a good chance for a large earnings short squeeze.
According to Karvy Global, Sina has recently been one of the 10 best-performing emerging-markets stocks.
Fuel Systems Solutions
Another stock that could see an earnings short squeeze is Fuel Systems Solutions (FSYS), which is due to report its results on Thursday before the market open. This company engages in the design, manufacturing and supply of alternative fuel components and systems for use in the transportation, industrial and power generation industries. This stock has made no notable move so far in 2011, with shares pretty much unchanged on the year. Wall Street analysts are looking for revenue of $76.51 to $82.43 million and for earnings ranging from a loss of a penny per share to earnings of 17 cents a share.
Fuel Systems Solutions is heavily tied and leveraged to the natural gas sector. I don’t expect this company to necessarily report a strong quarter since Washington has been so slow in implementing any legislation to benefit natural gas. However, I expect the European market for natural gas products to be strong and I think we’ve the potential for some bullish guidance from FSYS now that oil has started to skyrocket. No matter how slow Washington is at adopting natural gas incentives, the rapidly rising price of oil should be enough of a motivator for companies to start either buying, or seriously considering, some of the solutions and products that Fuel Systems sells.
The current short interest as a percentage of the float for FSYS is a rather large 21.9%. That means that out of the 13.7 million shares in the tradable float around 3.2 million shares are currently sold short by the bears as of Feb. 15. This is a ridiculously low float and a very high short interest here with FSYS. If Wall Street likes anything that these guys have to say, then the potential here for a big short squeeze is very high since the float is small.
From a technical standpoint, this alternative energy play has been beaten down big in the past six months from a high of around $42 a share to its current price of just under $29 a share. What I would like to see with this stock moving into the earnings report is for shares to take out some past overhead resistance at around $29.50 to $31 a share. If the stock moves above those levels, either before or after the earnings report, then I think this stock can easily short squeeze up to the next resistance level at $37 a share.
One more stock that could be setting up for a large earnings short squeeze is W&T Offshore (WTI), which is due to report earnings on Wednesday before the market opens. This company is an independent oil and natural gas producer engaged in the acquisition, exploitation, exploration and development of oil and natural gas properties in the Gulf of Mexico. This stock has been a monster so far in 2011 with shares up over 42%. Wall Street analysts are looking for revenue to come in between $172.30 million to $219.90 million and for earnings per share to be in a range of 26 cents to 44 cents.
The basic reason I like this name going into its earnings report is that the stock is trending strong with shares currently trading just one point off its 52-week high of $26.12.
Now, just because a stock is uptrending into its earnings report doesn’t guarantee a significant move higher. Last week, I highlighted InterDigital for the exact same reason, but the stock ended up falling sharply after the company disappointed the street. Basically, a strong trending stock like WTI really just has a higher probability of a continued move higher since the uptrend is already place, but again, it’s no guarantee.
W&T Offshore does have a few things going for it going into their report, like the soaring price of crude oil. It’s hard for me to imagine this company not issuing some bullish guidance now that crude oil is starting to look like it’s on a one-way collision course with $150 to $200 a barrel. Plus, the stock isn’t expensive with shares trading at around 11 times earnings and 17 times forward earnings.
As of Feb. 15, the current short interest as a percentage of the float for WTI is a ridiculously large 28.2%. That means that out of the 34.86 million shares in the tradable float around 9.83 million shares are sold short by the bears. Again, this is another case of a huge short interest and very low tradable float situation.
From a technical standpoint, there’s nothing I can say bad about this stock with shares now trading near a new 52-week high. This stock has even recently broken out above some past overhead resistance at around $24 a share. If the bulls can maintain control of this stock, and the company’s report is a bullish one, then I think it’s reasonable that an earnings short squeeze could send this stock north of $30 a share rather quickly.
Aa of the most-recent reporting period, W&T was the top holding of David Dreman at Dreman Value Management, with a position of 2.6 million share comprising 1.2% of the total portfolio.
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.