Stock Quotes in this Article: ISCA, MON, RECN, STZ

WINDERMERE, Fla. (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.

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.

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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.

 

Monsanto

My first earnings short-squeeze play today is chemical manufacturing stock Monsanto (MON), a provider of agricultural products for farmers, which is set to release numbers on Wednesday before the market open. Wall Street analysts, on average, expect Monsanto to report revenue of $2.55 billion on a loss of 42 cents per share.

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This stock has been uptrending very strong so far in 2012, with shares up close to 30%. Monsanto is currently trading just a point off its 52-week high of $91.95 a share ahead of the company's earnings report. The current short interest as a percentage of the float for Monsanto sits at 1%. That means that out of the 531.36 million shares in the tradable float, 5.57 million shares are sold short by the bears. The bears have also been increasing their bets from the last reporting period by 4.4%, or by about 236,000 shares.

From a technical perspective, MON is currently trading above both its 50-day and 200-day moving averages, which is bullish. This stock has been uptrending strong for the last four months, with shares soaring from a low of $69.70 to its recent high of $91.95 a share. During that uptrend, shares of MON have been consistently making higher lows and higher highs, which is bullish technical; price action. That move has now pushed MON within range of triggering a near-term breakout trade post-earnings.

If you’re bullish on MON, then I would wait until after its report and look for long-biased trades if it can manage to break out above some near-term overhead resistance at $91.95 a share with high volume. Look for volume on that move that hits near or above its three-month average action of 2.9 million shares. If we get that breakout, then look for MON to head north of $100 a share post-earnings.

I would simply avoid MON or look for short-biased trades if after earnings it fails to trigger that breakout, and then drops below its 50-day moving average at $88.13 a share with heavy volume. If we get that move, then MON will setup to re-test or possibly take out its next significant support level at $84.86 a share post-earnings.

Resources Connection

Another potential earnings short-squeeze trade is business services player Resources Connection (RECN), which is set to release its numbers on Tuesday after the market close. This professional services firm that provides clients with experienced professionals specializing in finance, accounting, risk management and internal audit, corporate advisory and strategic communications. There are no analyst estimates available for Resources Connection.

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This stock is off to a strong start in 2012, with shares up around 25% so far. Shares of Resources Connection are trading just one point off their 52-week high of $14.49 as we near the company's earnings report. The current short interest as a percentage of the float for Resources Connection stands at 3.7%. That means that out of the 40.50 million shares in the tradable float, 1.14 million shares are sold short by the bears.

From a technical perspective, RECN is currently trading above both its 50-day and 200-day moving averages, which is bullish. Shares of RECN recently formed a double bottom chart pattern at around $10.89 to $11.04 a share, and then subsequently went on to soar to its recent high of $13.61 a share. During that spike higher, shares of RECN were consistently making higher lows and higher highs, which is bullish technical price action. That move has now pushed RECN within range of triggering a near-term breakout trade post-earnings.

If you’re in the bull camp on RECN, then I would wait until after its report and look for long-biased trades if this stock can manage to break out above some near-term overhead resistance levels at $13.61 to $14.36 a share with high volume. Look for volume on that move that registers near or above its three-month average action of 204,956 shares. If RECN triggers that breakout, then this stock will have a great chance of re-testing or possibly taking out its next overhead resistance levels at $16 to $17 a share.

I would simply avoid RECN or look for short-biased trades if after earnings this stock fails to trigger that breakout, and then drop below some near-term support at $12.75 to $12.50 a share with high volume. If we get that move, then RECN will setup to re-test or possibly take out its 200-day at $12.16 and its 50-day at $12.08 a share post-earnings.

International Speedway

One earnings short-squeeze play worth watching here is International Speedway (ISCA), an owner of motorsports entertainment facilities and promoter of motorsports-themed entertainment activities in the U.S., which is set to release numbers on Thursday before the market open. Wall Street analysts, on average, expect International Speedway to report revenue of $127.35 million on earnings of 8 cents per share.

The current short interest as a percentage of the float for International Speedway is rather high at 5.9%. That means that out of the 33.25 million shares in the tradable float, 1.51 million shares are sold short by the bears. The bears have also been increasing their bets from the last reporting period by 14.8%, or by about 194,000 shares.

From a technical perspective, ISCA is currently trading above both its 50-day and 200-day moving averages, which is bullish. This stock formed a bottoming chart pattern back in August at around $24.75 to $25 a share. Following that bottom, shares of ISCA soared and trended up to its recent high of $29.30 a share. During that spike higher, shares of ISCA were consistently making higher lows and higher highs, which is bullish technical price action. That move has now pushed ISCA within range of triggering a near-term breakout trade post-earnings.

If you’re bullish on ISCA, then I would wait until after its report and look for long-biased trades if this stock can manage to break out above some near-term overhead resistance levels at $29.30 to $30.64 a share with high volume. Look for volume on that move that hits near or above its three-month average action of 155,631 shares. If ISCA can trigger that breakout, then this stock will have a great chance to re-test or possibly take out its next significant overhead resistance level at $32.04 a share.

I would avoid ISCA or look for short-biased trades if after earnings it fails to trigger that breakout, and then drops below some near-term support at $27.89 to $27 a share with high volume. If we get that move, then ISCA will setup to re-test or possibly take out both its 50-day at $26.78 and its 200-day at $26.92 a share.

Constellation Brands

My final earnings short-squeeze trade idea is alcoholic beverages producer Constellation Brands (STZ), which is set to release numbers on Friday before the market open. Wall Street analysts, on average, expect Constellation Brands to report revenue of $710.09 million on earnings of 54 cents per share.

This stock has been uptrending extremely strong so far in 2012, with shares up a whopping 60%. This bullish price action has pushed shares of Constellation Brands within one point of its 52-week high of $34.20 ahead of its report. The current short interest as a percentage of the float for Constellation Brands sits at 1.9%. That means that out of the 147.45 million shares in the tradable float, 2.82 million shares are sold short by the bears.

From a technical perspective, STZ is currently trading above both its 50-day and 200-day moving averages, which is bullish. This stock has been trending sideways for the past month and change, between $32 and $34.20 a share. If we get a move topside of that trading pattern post-earnings, then we will likely see the next major trend for STZ develop.

If you’re in the bull camp on STZ, then I would wait until after its earnings report and look for long-biased trades if this stock manages to break out above some near-term overhead resistance levels at $34.16 to $34.20 a share with high volume. Look for volume on that move that registers near or above its three-month average action of 2.8 million shares. If we get that breakout, then look for STZ to possibly hit $40 a share or higher post-earnings.

I would simply avoid STZ or look for short-biased trades if after earnings it fails to trigger that breakout, and then moves back below some near-term support $32 to $31.61 a share with high volume. If we get that move, then STZ will setup to re-test or possibly take out its next significant support levels at $29 to $28 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 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.