Stock Quotes in this Article: CYBX, DAKT, DMND, ZQK

 WINDERMERE, Fla. (Stockpickr) -- One way to make a lot of money in a very short time frame is to take advantage of a stock that experiences a large earnings-related short squeeze.

Short-sellers hate being caught short when a company produces earnings that please Wall Street bulls. When this happen, we often see gigantic short squeezes develop as the bears quickly throw in the towel to cover their positions and avoid even bigger potential losses. Even the best short-sellers know that it’s never a good idea to stay short once a big short-covering rally materializes.

This is precisely why I search the market for heavily shorted stocks that are about to report earnings. You only need to find a couple of these candidates in a year to help enhance your portfolio returns -- the gains become so outsized in such a short timeframe 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.

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    First, don’t ever bet any amounts of money that will cause you to lose sleep at night. Keep your bets reasonable and only use risk capital, or capital you have designated for speculating with.

    Also, cut your losses fast when you’re wrong, and don’t be afraid to take the other side of the trade if things don’t set up right. The goal is to capture as much volatility as you can in a very short timeframe.

    Here’s a look at a number of stocks that could experience big short squeezes when they report earnings this week.

    Daktronics

    My first earnings short-squeeze candidate is Daktronics (DAKT), a supplier of electronic scoreboards, electronic display systems and related marketing services, digital messaging solutions, software and services for sporting, commercial and transportation applications. Daktronics reported earnings this morning before the close of 7 cents a share on revenue of $114.4 million, up from estimates for 5 cents a share on revenue of $106.3 million.

    Since February, this stock has been beaten down hard, from around $16.50 to as low as $9.43 last week. Since its report, it's up almost 9% today at $11.71. My play here now is to look at Daktronics as a rebound trade since the company reported a solid profit for the quarter vs. a loss from the previous year. Value investors could now see this stock as a turnaround story since it looks like it is in the early stages of coming out of the red.

    The current short interest as a percentage of the float for Daktronics is 6.1%. That means that out of the 35.28 million shares that are in the tradable float, 2.18 million are currently sold short by the bears as of May 13.

    From a technical standpoint, this stock has started to find some buying support at around $9.50 to $10 a share. The stock has also started to challenge its 200-day moving average of $11.97 on huge volume. Volume today has already clocked in at over 700,000 shares, which is well above the three-month average volume of 169,000 shares.

    The way I would play Daktronics here is to buy the stock if it breaks out above some near-term overhead resistance at $11.78 a share. I would add to my position aggressively if the stock closes above $11.95, its 200-day moving average, on strong volume.

    There's a huge gap that could get filled on this stock that could take shares back toward $16.50. If you see upside volume that keeps moving into this stock and if it holds those breakout levels on a closing basis, then it could really run much higher.

    Cyberonics

    My next earnings short-squeeze trade idea is Cyberonics (CYBX), which is set to report its results on Thursday before the market opens. Cyberonics is a neuromodulation company engaged in the design, development, sales and marketing of implantable medical devices that provide a therapy, vagus nerve stimulation therapy, for the treatment of refractory epilepsy and treatment-resistant depression. Wall Street analysts, on average, expect Cyberonics to report revenue of $51.62 million on earnings of 29 cents per share.

    This stock is trending very strongly heading into the quarter with shares just a few points off of the 52-week high of $35.88. The current short interest as a percentage of the float for Cyberonics is 6.2%, which means that out of the 22.05 million shares in the tradable float, 1.68 million are sold short by the bears. This is a reasonable short interest on a stock with a low float. Big gains could be seen if Cyberonics delivers what the bulls want.

    From a technical standpoint, this stock just tested its 50-day moving average of $33.30 on Tuesday on huge volume. Volume registered 492,000 shares vs. the three-month average volume of 148,000 shares. That said, the stock closed below the 50-day and well off its highs of the trading session. I would like to see this stock trend above that 50-day heading into its report.

    The way I would trade Cyberonics is to wait until after it reports and buy this stock once it takes out $34 a share, which is a major overhead resistance zone. If that happens, I would add to the position again once it breaks out above $35.88. I would use a mental stop at around the 50-day moving average in case the stock fails to spike higher.

    One could also speculate on some near-the-money call options on this one into the earnings report as long as the stock is trending about that 50-day with strong volume patterns.

    Diamond Foods

    Another earnings short-squeeze trade to consider is Diamond Foods (DMND), which is due to report results on Thursday after the market close. This company specializes in processing, marketing and distributing snack products and culinary, in-shell and ingredient nuts. Wall Street analysts, on average, expect Diamond Foods to report revenue of $216.63 million on earnings of 48 cents per share.

    Thissnack food company's stock has been on fire of late, with shares trading near a new 52-week high. The company just bought Pringles from Procter & Gamble (PG) for $2.5 billion, which could quickly turn Diamond Foods into a global snack food powerhouse. It seems like Diamond is making all the right moves, and with the stock close to its 52-week high, I want to watch for a short squeeze here going into earnings.

    The current short interest as a percentage of the float for Diamond is an extremely large 29.2%. That means that out of the 20.06 million shares in the tradable float, 6.23 million are sold short by the bears. The short-sellers have also been increasing their bets from the last reporting period by 11%, or about 616,000 shares. This is a large increase and short interest on a stock with a very low trading float. We could easily see a huge short squeeze here if Diamond delivers solid results.

    From a technical standpoint, my only concern is that the stock might be a bit overbought going into the quarter based off of some momentum indicators such as the relative strength index. That said, overbought doesn’t mean the stock is going to fall, it just means it could be more vulnerable to a selloff. This stock is so heavily short that it could easily squeeze higher on any bullish news.

    The way I would play this stock is to wait until after the report and only buy if it takes out that 52-week high of $75.92 on strong volume. Look for volume that’s well above the three-month average volume of 323,400 shares. If we get a quick breakout and short squeeze after Diamond reports, I would take that trade and lock in profits quick since the sock is extended past its 50-day moving average by over 25 points.

    Quiksilver

    One more earnings short-squeeze candidate to keep on your radar is Quiksilver (ZQK), which is set to release numbers on Thursday after the market close. This is a diversified company that designs, develops and distributes branded apparel, footwear, accessories and related products, catering to the casual, youth lifestyle associated with the sports of surfing, skateboarding and snowboarding. Wall Street analysts, on average, expect this company to report revenue of $471.74 million on earnings of 7 cents per share.

    Quiksilver sells into an interesting niche market but has fallen on hard times as its leading brands struggle to gain any traction domestically. That said, there’s some buzz going around about its new women’s clothing line that could generate some excitement back into the stock. Quiksilver has also recently extended sponsorship agreements with two very popular surfers that are world renowned. These deals will help to push their brand name around the globe, and potentially boast sales, since sports fans love to buy the gear of their favorite athletes.

    The current short interest as a percentage of the float for Quiksilver is 5.9%, which means that out of the 118.44 million shares in the tradable float, 6.77 million are sold short by the bears. The short-sellers have also been increasing their best from the last reporting period by around 7.9%, or by about 496,000 shares.

    From a technical standpoint, this stock just started to move above both its 50-day and 200-day moving averages on solid volume. Upside volume for the last two trading sessions has clocked in at 1.6 and 1.3 million versus the three-month average volume of around 1 million shares. It’s also worth noting that the stock has a ton of support at around $4 a share, so it’s possible it has put in a bottom if it can hold that level.

    One way to play this stock is to buy it as soon as it breaks out above some past overhead resistance at around $4.93 a share. We could easily see a run toward $5.50 to $5.70 a share, which are the next significant overhead resistance levels. The chances for a big pop here following earnings look pretty good, so keep this on your radar.

    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.

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    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.