Stock Quotes in this Article: AYI, FDO, MAR, OCZ

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.

 

Acuity Brands

My first earnings short-squeeze play is Acuity Brands (AYI), which is set to release numbers on Tuesday before the market open. This company is a provider of lighting fixtures, control devices, components, systems and services for commercial and institutional, industrial, infrastructure and residential applications for various markets throughout North America and select international markets. Wall Street analysts, on average, expect Acuity Brands to report revenue of $522.09 million on earnings of 92 cents per share.

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This stock has been uptrending pretty strong so far in 2012, with shares up around 20%. Shares of Acuity Brands are currently trading about six points off its 52-week high of $69.46 a share ahead of its report. The current short interest as a percentage of the float for Acuity Brands is notable at 5.5%. That means that out of the 41.15 million shares in the tradable float, 2.32 million shares are sold short by the bears.

From a technical perspective, AYI 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 three months, with shares soaring from a low of $48 to its recent high of $69.46 a share. During that uptrend, shares of AYI have been consistently making higher lows and higher highs, which is bullish technical price action.

If you’re bullish on AYI, then I would wait until after its report and look for long-biased trades as long as this stock is trending above its 50-day moving average at $63.72 a share, and then once it takes out some near-term overhead resistance at $66 a share with high volume. Look for volume on that move that registers near or above its three-month average action of 340,461 shares. If that breakout triggers, then AYI will have a great chance to re-test or possibly take out its 52-week high of $69.46 a share.

I would simply avoid AYI or look for short-biased trades if after earnings it fails to trigger that breakout, and then drops below some near-term support at $61.14 a share with heavy volume. If we get that move, then AYI will setup to re-test or possibly take out its 200-day moving average of $58.48 a share.

Family Dollar Stores

Another potential earnings short-squeeze trade is retail discount store chain Family Dollar Stores (FDO), which is set to release its numbers on Wednesday before the market open. Wall Street analysts, on average, expect Family Dollar Stores to report revenue of $2.36 billion on earnings of 75 cents per share.

During the last quarter, this company matched Wall Street estimates after it reported net income of $1.06 per share. In the previous second quarter, the company topped Wall Street estimates by 2 cents per share. Family Dollar Stores is looking to report its fourth-straight revenue increase heading into this quarter.

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The current short interest as a percentage of the float for Family Dollar Stores sits at 4%. That means that out of the 97.57 million shares in the tradable float, 4.45 million shares are sold short by the bears. The bears have also been increasing their bets from the last reporting period by 34%, or by about 1.12 million shares. If the shorts are caught leaning too hard into this quarter, then we could easily see FDO soar higher post-earnings.

From a technical perspective, FDO is currently trading above both its 50-day and 200-day moving averages, which is bullish. This stock had been downtrending badly since June, with shares dropping from a high of $74.48 to its recent low of $61.06 a share. During that downtrend, shares of FDO were consistently making lower highs and lower lows, which is bearish technical price action. That said, the stock has started to rebound and move back above its 50-day moving average of $64.29 a share.

If you’re in the bull camp on FDO, 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 at $66.58 to $66.96 a share with high volume. Look for volume on that move that hits near or above its three-month average action of 1.5 million shares. If FDO triggers that breakout, then this stock will have a great chance of re-testing or possibly taking out its next significant overhead resistance levels at $69.14 to $70.78 a share post-earnings.

I would simply avoid FDO or look for short-biased trades if after earnings this stock fails to trigger that breakout, and then drops back below its 50-day moving average at $64.29 a share with high volume. If we get that move, then FDO will setup to re-test or possibly take out its 200-day moving average of $62.37 a share. If that 200-day gets taken out with volume, then FDO could easily drop below some more near-term support at $61.06 a share.

OCZ Technology Group

One earnings short-squeeze play is computer storage device maker OCZ Technology Group (OCZ), which is set to release numbers on Wednesday after the market close. Wall Street analysts, on average, expect OCZ Technology Group to report revenue of $119.69 million on a loss of 15 cents per share.

The current short interest as a percentage of the float for OCZ Technology Group is extremely high at 41.4%. That means that out of the 64.78 million shares in the tradable float, 26.85 million shares are sold short by the bears. The bears have also been increasing their bets from the last reporting period by 4.5%, or by about 1.16 million shares.

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From a technical perspective, OCZ is currently trading well below both its 50-day and 200-day moving averages, which is bearish. This stock has been downtrending hard from late July, with shares plunging from $7.67 to its recent low of $3.03 a share. During that downtrend, shares of OCZ have been consistently making lower highs and lower lows, which is bearish technical price action. That said, the stock has now moved into oversold territory, since its current relative strength index reading is now below 30. Oversold can always get more oversold, but we can also watch for a bounce here in OCZ off earnings.

If you’re bullish on OCZ, then I would wait until after its report and look for long-biased trades if this stock can manage to hold its trend above its recent low at $3.03 a share with strong upside volume flows. Look for volume on that move that hits near or above its three-month average action of 4.7 million shares. If OCZ can hold that level and start to uptrend with volume, then this stock could possibly hit $4.50 to its 50-day moving average of $5.10 a share post-earnings.

I would avoid OCZ or look for short-biased trades if after earnings it fails to hold above $3.03 a share. If we get that action, then OCZ will setup to trend lower and take out its 52-week low at $3.03 a share, which is bearish technical price action.

Marriott International

My final earnings short-squeeze trade idea is Marriott International (MAR), which is set to release numbers on Wednesday after the market close. This a diversified hospitality company has more than 3,700 properties in 73 countries and territories. Wall Street analysts, on average, expect Marriott International to report revenue of $2.65 billion on earnings of 40 cents per share.

This stock has been uptrending very strong in 2012, with shares up around 35%. This bullish price action has shares of Marriott International trending just three points off its 52-week high of $41.84 a share ahead of its report.

The current short interest as a percentage of the float for Marriott International is rather high at 7.5%. That means that out of the 242.86 million shares in the tradable float, 18.49 million shares are sold short by the bears.

From a technical perspective, MAR 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 two months, with shares soaring from a low of $34.69 to its recent high of $41.84 a share. During that uptrend, shares of MAR were consistently making higher lows and higher highs, which is bullish technical price action. Shares of MAR have cooled off a big recently from that $41.84 high to its current price of around $39.50 a share.

If you’re in the bull camp on MAR, 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 $40.50 to $41.84 a share with high volume. Look for volume on that move that registers near or above its three-month average action of 2,919,510 shares. If we get that breakout, then MAR will have a great chance of tagging $45 a share or possibly much higher. Keep in mind that any move over $41.84 will push MAR into new 52-week-high territory, which is bullish technical price action.

I would simply avoid MAR or look for short-biased trades if after earnings it fails to trigger that breakout, and then moves back below some near-term support at $38.76 to $38.07 a share with high volume. If we get that move, then MAR will setup to re-test or possibly take out its 200-day moving average of $36.80 a share post-earnings.

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.