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3 Earnings Stocks With Short-Squeeze Potential - 12389 views
WINDERMERE, Fla. (Stockpickr) -- Trading a heavily shorted stock from the long side ahead of a company’s earnings can produce solid gains if the bulls are rewarded with positive results. And that’s exactly what happened with two of my three earnings short-squeeze picks last week.
Athletic shoe and clothing retailer Finish Line (FINL), one of the earnings trades I highlighted, delivered solid results that sent shares soaring. Finish Line reported a strong fourth quarter that showed a 12% increase in profits on revenue of $384.6 million, compared with analyst estimates for $376.2 million. The stock ran from around $17.50 on March 23 when my piece went live to a high of $19.70 on March 25.
The nation’s biggest egg seller, Cal-Maine Foods (CALM), was my other earnings short-squeeze winner. The company reported better-than-expected results but said net income fell due to feed costs. Despite the higher feed costs, results still trumped Wall Street estimates, sending the stock from around $28 to over $30 a share on huge volume.
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The one loser that I recommended was BlackBerry maker Research In Motion (RIMM). RIM reported strong quarterly results but issued lousy guidance that knocked the stock down 10% in after hours trading. I thought that if RIM could trade above its 50-day moving average on heavy volume prior to the report then it could see some short covering. Shares of RIM closed that day practically on the 50-day on big volume, but it wasn’t enough. This is part of trading; nobody is going to nail every call.
Before you trade any earnings short-squeeze candidate, make sure you’re only using risk capital and you’re prepared to cut your losses quick in case the trade doesn’t pan out, as happened with RIM. You’ll also need to be prepared to trade outside of regular trading hours because that happens to be when most earnings reports are released.
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.
Jos. A. Bank Clothiers
My first earnings short squeeze play is Jos. A. Bank Clothiers (JOSB), which is scheduled to report its results on Thursday before the market opens. This company is a designer, manufacturer, retailer and direct marketer (through stores, catalog and Internet) of men’s tailored and casual clothing and accessories. This stock is off to a decent start in 2011, with shares up around 17%. Wall Street analysts, on average, expect the company to report revenue of $305.73 million on earnings of $1.44 per share.
Wall Street is expecting good things out of Jos. A. Bank as the job market continues to recover and consumer spending improves. On Monday, a consumer spending report showed an increase of 0.7% in February, which represents the eight consecutive month of gains. Disposable personal income also rose for the fifth straight month through February. A recent jobs report showed that the economy added 192,000 jobs in February, or 17,000 more jobs than economists had expected.
There’s another key jobs report due out on Friday this week, but the recent upward trend should bode well for Jos. A. Bank's coming quarter.
The current short interest as a percentage of the float for JOSB is a rather large 19.3%. That means that out of the 27.35 million shares that are in the tradable float, 5.27 million are currently sold short by the bears as of March 15. Since JOSB has a low float and large short interest, the stock could easily see a massive short squeeze if earnings are solid.
From a technical standpoint, JOSB hit a new 52-week high yesterday, and the stock broke out above some previous overhead resistance at around $48 a share. As long as this stock doesn’t dip below the 50-day moving average of around $45 a share prior to the report, then I would look to buy this stock for a potential earnings short squeeze. Keep in mind that the $45 area is a huge support level at which the stock has found buyers consistently for the past month.
My next earnings short squeeze trade idea is Lindsay (LNN), which is set to report its results on Wednesday before the market opens. This company is a leading provider of irrigation systems and infrastructure products. So far in 2011 this stock has banked some solid results with gains of over 24%. Wall Street analysts, on average, expect Lindsay to report revenues of $109.80 million on earnings per shares of 71 cents.
I expect Lindsay to be a big beneficiary of the agriculture bull market that we’ve seen in commodity prices for the past number of months. Global food demand and soaring soft commodity prices recently helped ag player Archer Daniels Midland (ADM) report a monster quarter. I am hoping for the same thing from Lindsay since their products are essential to farmers who want to get maximum crop yields.
The current short interest as a percentage of the float for LNN is a whopping 22%. That means that out of the 10.61 million shares in the tradable float, 2.71 million are currently sold short by the bears as of March 15. This is a very high short interest for an extremely low float stock. If these guys report good numbers, then this stock is going to skyrocket.
From a technical standpoint, LNN has been in a solid uptrend and it’s been trading above its 50-day moving average for the past couple of months. I would like to see this stock hold some near-term support at around $72.50 prior to their earnings. It might be worth getting more aggressively long into this stock if it continues to trend above $75 before earnings. I would completely avoid it for a trade if it breaks $72.50, or at last resort, breaks below its 50-day moving average around $70 a share.
Krispy Kreme Doughnuts
My final earnings short-squeeze candidate is doughnuts and packaged sweets retailer Krispy Kreme Doughnuts (KKD), which is due to report results on Thursday after the market close. This stock has traded pretty much flat year-to-date, with shares off around 4.8%. Wall Street analysts, on average, expect Krispy Kreme to report revenues of $92.55 million on earnings of 4 cents per share.
This company is still relatively early into its turnaround story, which has been focused on cutting costs, refranchising stores, growing aggressively into international markets and introducing new products. Due to the recent pickup in consumer spending, Krispy Kreme has a great chance of beating Wall Street estimates. In fact, this stock could easily catch the shorts and all of Wall Street off guard since the stock has fallen off of the street’s radar since its fall from grace.
The current short interest as a percentage of the float for KKD is 6% as of March 15. That means that out of the 54 million shares in the tradable float, 3.2 million are currently sold short by the bears. This isn’t a huge short interest, but it’s large enough. Plus the stock is priced low enough to easily spike this name 10% or more if earnings are solid.
From a technical standpoint, I want to see KKD take out some near-term resistance at around $6.84 a share prior to their report. It would be constructive if that were to occur on volume well above the three-month average activity of 788,000 shares. My target would be $8 or higher if we do get an earnings short squeeze. I would bail on this trade if the stock drops below $6.37 a share, since that’s the most recent prior resistance level that the stock has managed to trade above.
-- 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.