Stock Quotes in this Article: AA, ISCA, PSMT, XRTX

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 timeframe 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. That’s why it can be worth betting prior to the report -- but only if you have a very strong conviction that the stock is going to rip higher, and its acting technically very bullish. Remember, even when you have that conviction and you 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, and then jump in and trade the prevailing trend on a heavily-shorted stock that’s reporting its numbers.

With that in mind, here’s a look at several stocks that could experience big short squeezes when they report earnings this week.

International Speedway

My first earnings short-squeeze play is specialty retail player International Speedway (ISCA), which is set to report results on Thursday before the market open. This company is the owner of motorsports entertainment facilities and promoter of motorsports themed entertainment activities in the U.S. Wall Street analysts, on average, expect International Speedway to report revenues of $158.65 million on earnings of 40 cents per share.

The current short interest as a percentage of the float for International Speedway is notable at 6.2%. That means that out of the 34.75 million shares in the tradable float, 1.55 million shares are sold short by the bears. The bears have also been increasing their bets from the last reporting period by 8.6%, or by about 122,000 shares. If the bears are caught leaning too hard into this quarter, then we could easily see a solid short-squeeze develop for ISCA post-earnings.

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From a technical perspective, ISCA is currently trading above both its 50-day and 200-day moving averages, which is bullish. This stock bottomed after a sharp decline in late May at around $22.98 a share. After hitting that bottom, shares of ISCA have been uptrending strong and making mostly higher lows and higher highs, which is bullish technical price action. That move is quickly pushing the stock within range of triggering a near-term breakout trade.

If you’re bullish on ISCA, then I would wait until after it reports earnings and look for long-biased trades if this stock can manage to trigger a break out above some near-term overhead resistance at $27.49 to $28.49 a share with high volume. Look for volume on that move that hits near or above its three-month average action of 174,308 shares. If we get that move, then ISCA will have a great chance of re-testing and taking out its 52-week high of $30.90 a share.

I would simply avoid ISCA or look for short-biased trades if after earnings it fails to trigger that breakout and then drops below its 50-day at $24.93 and it 200-day at $24.84 a share with high-volume. If we get that move, then ISCA could easily drop towards $24 to $23 a share or possibly much lower if the bears hammer this stock down post-earnings.

Xyratex

Another potential earnings short-squeeze play is technology player Xyratex (XRTX), which is set to release its numbers on Thursday after the market close. This company is a provider of data storage technology, including modular solutions for the enterprise data storage industry and hard disk drive capital equipment for the HDD industry. Wall Street analysts, on average, expect Xyratex to report revenues of $327.03 million on earnings of 29 cents per share.

Last Tuesday, Cantor Fitzgerald started coverage on this stock with a hold rating and a price target of $12 a share. This stock has been beaten down hard heading into its quarterly report, since shares have dropped over 28% in the last three months.

The current short interest as a percentage of the float for Xyratex sits at 5.3%. That means that out of the 27.31 million shares in the tradable float, 1.45 million shares are sold short by the bears. The bears have also been increasing their bets from the last reporting period by 43.9%, or by about 443,600 shares. If the shorts are caught pressing too hard into the recent sharp decline, then we could easily see a snapback short-covering rally for XRTX post-earnings.

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From a technical perspective, XRTX is currently trading below both its 50-day and 200-day moving averages, which is bearish. This stock has been downtrending hard during the last four months, with shares dropping from its March high of $17.96 a share to its recent low of $10.52 a share. During that big move lower, shares of XRTX have been making lower highs and lower lows, which is bearish technical price action. That said, the stock has started to trend sideways during the last month and change, between $10.52 and $12.26 a share. A move outside of that range post-earnings will likely setup the next major trend for XRTX.

If you’re in the bull camp on XRTX, then I would wait until after it reports numbers and look for long-biased trades if this stock can manage to take out some near-term overhead resistance at $12.26 a share with high-volume. Look for volume on that move that registers near or above its three-month average action of 349,702 shares. If we get that action, then XRTX could easily tag its 200-day at $13.87 or possibly some more overhead resistance at $14.94 post-earnings.

I would simply avoid XRTX or look for short-biased trades if after earnings this stock fails to trigger that breakout, and then takes out some major near-term support at $10.63 to $10.52 a share with high volume. If we get that action, then XRTX could easily trade back toward $9 to $8 a share if the bears whack this stock lower post-earnings.

PriceSmart

One possible earnings short-squeeze trade in the specialty retail complex is PriceSmart (PSMT), which is set to release numbers on next Monday after the market close. This company consists primarily of international membership shopping warehouse clubs similar to warehouse clubs in the U.S. Wall Street analysts, on average, expect PriceSmart to report revenue of $510.68 million on earnings of 60 cents per share.

This stock has been trading pretty flat on the year, with shares only down by 3.3% so far in 2012. Back on June 23, Roth Capital initiated coverage on this stock with a neutral rating. During the last quarter, PriceSmart missed Wall Street earnings estimates, after reporting earnings of 67 cents per share vs. estimates of 69 cents per share. The company’s revenue for the quarter was up 22.3% on a year-over-year basis.

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The current short interest as a percentage of the float for PriceSmart is pretty high at 12%. That means that out of the 21.18 million shares in the tradable float, 2.22 million shares are sold short by the bears. The bears have also been increasing their bets from the last reporting period by 6.4%, or by about 134,000 shares. This stock has a very low float and a rather high short interest. If PriceSmart can deliver the numbers the bulls are looking for, then we could easily see a big short-squeeze kickoff post-earnings.

From a technical perspective, PSMT is currently trading below both its 50-day and 200-day moving averages, which is bearish. This stock has been hammered by the bears during the last two months, with shares dropping from its May high of $84.32 to a recent low of $61.15 a share. During that sharp move lower, shares of PSMT have consistently made lower highs and lower lows, which is bearish technical price action. That said, shares of PSMT have started to form a double bottom at $61.15 to $62.10 a share. This stock has now bounced off that bottom and it’s now trading within range of a near-term breakout trade.

If you’re bullish on PSMT, then I would wait until after they report and look for long-biased trades if this stock can manage to trigger a break out above some near-term overhead resistance at $69.21 a share, and then above its 50-day moving average of $71 a share with high volume. Look for volume on that move that hits near or above its three-month average volume of 304,805 shares. If we get that action, then PSMT could easily spike higher towards its next significant overhead resistance level at $79 a share.

I would avoid PSMT or look for short-biased trades if after earnings it fails to trigger that breakout and then drops below some near-term support at $65 a share with high volume. If we get that move, then look for PSMT to re-test and possibly take out those double bottom zones near $62.10 to $61.15 a share.

Alcoa

My final earnings short-squeeze play today is metal mining player Alcoa (AA), which is set to release numbers on next Monday after the market close. This company is engaged in the production and management of primary aluminum, fabricated aluminum and alumina combined, through its participation in technology, mining, refining, smelting, fabricating and recycling. Wall Street analysts, on average, expect Alcoa to report revenues of $5.83 billion on earnings of 6 cents per share.

If you’re looking for a large-cap stock that’s been taken lower heading into its quarterly earnings report, then make sure to check out shares of Alcoa. This stock has been smacked lower by the sellers during the last three months, since shares are down by around 15%. Shares of Alcoa are currently trading just 40 cents above its 52-week low of $8.21 a share.

The current short interest as a percentage of the float for Alcoa is pretty high at 7.6%. That means that out of the 1.07 billion shares in the tradable float, 80.65 million shares are sold short by the bears. The bears have also been increasing their bets from the last reporting period by 3.1%, or by about 2.45 million shares.

From a technical perspective, AA is currently trading below both its 50-day and 200-day moving averages, which is bearish. This stock has trending lower for the last five months, with shares sliding down from its February high of $10.88 to a recent low of $8.21 a share. During that downtrend, shares of AA have mostly made lower highs and lower lows, which is bearish price action. That said, this stock has started to trend sideways during the last month, between $8.21 on the downside and $9 on the upside. A move outside of that range post-earnings will likely set up the next major trend for AA.

If you’re in the bull camp on AA, I would look for long-biased trades if after earnings it triggers a break out above some near-term overhead resistance at $9 a share with high volume. Look for volume on that move that registers near or above its three-month average action of 23.3 million shares. If we get that action, then AA could easily tag $10 to $10.50 a share post-earnings.

I would simply avoid AA or look for short-biased trades after earnings the stock fails to trigger that breakout, and then moves below some major near-term support at $8.29 to $8.21 a share with high-volume. If we get that action, then AA will enter new 52-week low territory which will be very bearish. The stock could easily hit $7 post-earnings if we see that bearish action.

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.