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WINDERMERE, Fla. (Stockpickr) -- Short-sellers hate being caught short a stock that produces bullish results. When this happens, we often see 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 kicks off 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.
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 trade 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 the stock is acting technically bullish and you have a strong conviction that it is going to rip higher.
With that in mind, here’s a look at several stocks that could experience big short squeezes when they report quarterly earnings this week.
My first earnings short-squeeze candidate today is oil well services and equipment player Mitcham Industries (MIND), which is set to report its numbers on Tuesday after the market close. This company, through its subsidiaries, engages in the leasing, manufacture, and sale of seismic equipment to the oil and gas industry worldwide. Wall Street analysts, on average, expect Mitcham Industries to report revenues of $31.07 million on earnings of 57 cents per share.
If you’re looking for a strong-trending small-cap stock heading into its earnings report, then make sure to check out shares of Mitcham Industries. During the last six months, this stock has run-up from $10.69 to its current price of $23.49 a share. As we get close to its quarterly earnings report, shares of Mitcham are trading around four points off its 52-week high of $26.76.
The current short interest as a percentage of the float for Mitcham Industries stands at 3.8%. That means that out of the 11.70 million shares in the tradable float, 449,098 shares are sold short by the bears. This isn’t a huge short interest, but since the float is so small it’s more than enough to spark a sizeable short squeeze if Mitcham can report solid numbers and bullish guidance.
From a technical perspective, MIND is currently trading above both its 50-day and 200-day moving averages, which is bullish. This stock just started to move back above its 50-day moving average of $22.79 on Monday with decent volume. Shares of MIND have been trading range-bound for the past month, between $24 on the upside and $20.30 on the downside. A move outside of that range post-earnings should set this stock up for its next major trend.
If you’re bullish on MIND, I would look for long-biased trades following its report if it manages to break out above some near-term overhead resistance at $23.50 to $24 a share with high-volume. Look for volume on that move that’s near or well above its three-month average action of 228,211 shares. If we get that action, then I would look for this stock to re-test its 52-week high of $26.76 a share or possibly trend higher if the bulls gain full control post-earnings.
I would avoid MIND or look for short-biased trades if after earnings the stock fails to take out $24 and then drops back below that key support at $20.30 a share with high volume. If we get that action, I would target a drop back toward its 200-day moving average of $18.11 a share or possibly lower if the bears hammer this down post-earnings.
Mitcham shows up on a list of 5 Small-Cap Opportunities in the Oil & Gas Sector.
Another earnings short-squeeze play in the recreational activities complex is International Speedway (ISCA), which reported results on Tuesday before the market open. This company is the owner of motorsports entertainment facilities and promoter of motorsports themed entertainment activities in the U.S.
International Speedway reported that its fiscal first-quarter profit dropped 20%, hurt by the the tough economy and the shift of some racing events to other periods. ISCA reported net income of $17.1 million, or 37 cents per share, versus $21.4 million, or 45 cents per share, in the same period a year ago. Revenue dropped 14% or $127.4 million from 148.7 million.
This company has been far from consistent with its earnings report, jumping around from beating to missing Wall Street estimates during the past fiscal year. That said, the stock is trading just 4 points off its 52-week high of $32.32.
The current short interest as a percentage of the float for International Speedway sits at 5.8%. That means that out of the 28.51 million shares in the tradable float, 1.50 million are sold short by the bears. This isn’t a huge short interest, but it’s more than enough to spark a decent short-covering rally if ISCA can report strong earnings and bullish forward guidance.
From a technical perspective, ISCA is currently trading above both its 50-day and 200-day moving averages, which is bullish. This stock has been on a tear for the past six months, rising from $20.08 to its current price of just above $28 a share. The stock also just triggered a near-term breakout trade once it cleared some overhead resistance at $27.50 with big volume.
If you’re bullish on ISCA, I would look for long-biased trades after its earnings report as long as this stock continues to trend above $27.50 with strong upside volume flows. Look for upside volume that’s near or well above its three-month average action of 137,934 shares. If we get that action, then look for ISCA to make a run at its next significant overheard resistance levels of $30.90 to $32.32 a share or possibly trend higher if the bulls gain full control of this stock post-earnings.
I would simply avoid ISCA or look for short-biased trades if after earnings it trades back below $27.50 a share with heavy volume. If we get that action, look for ISCA to re-test some near-term support at $25 a share or possibly trend much lower if the bears spark a deep selloff post-earnings.
A potential earnings short-squeeze trade in the electronics instruments and controls complex is Acuity Brands (AYI), which is set to release numbers on Wednesday before the market open. This company, through its subsidiaries, engages in the design, production, and distribution of lighting solutions and services in North America and internationally. Wall Street analysts, on average, expect Acuity Brands to report revenues of $454.72 million on earnings of 62 cents per share.
Wall Street analysts are looking for a 38% rise in second-quarter earnings per share for Acuity Brands, which if hit would mark the second straight quarter of accelerating earnings growth. Recently, Canaccord Genuity reiterated its buy rating on the stock and raised its price target to $81 from $63 a share. The firm said execution has been impressive, having consistently gained market share in a flat/declining end market over the past few years while managing its costs.
The current short interest as a percentage of the float for Acuity Brands is notable at 5.9%. That means that out of the 40.76 million shares in the tradable float, 2.45 million are sold short by the bears. The bears have also been increasing their bets from the last reporting period by 6.2%, or by about 143,000 shares. If the bears are caught leaning to heavy into the quarter, then we could easily see a sizable short-squeeze trigger that pushed this stock up notably higher.
From a technical perspective, AYI is currently trending above both its 50-day and 200-day moving averages, which is bullish. This stock has been trending very strong for the past six months, with shares rising from $42.10 to a recent high of $64.82. During that uptrend, AYI has consistently made higher lows and higher highs, which is bullish technical price action. That move has now pushed AYI within range of triggering a near-term breakout trade post-earnings.
If you like the setup for AYI here, I would look for long-biased trades after its report if the stock manages to break out above some near-term overheard resistance at $64.82 a share, or above Tuesday’s daily high on heavy volume. Look for volume on that move that registers near or well above its three-month average action of 322,752 shares. If we get that action, I would look for AYI to trend up towards $70 to $75 a share post-earnings.
I would simply avoid this stock or look for short-biased trades if AYI fails to break out and then drops below some near-term support at $62.50 to $61.40 (its 50-day) a share with high volume. Target a drop toward $58 to $56 a share or possibly lower if the bears whack this stock down post-earnings.
My final earnings short-squeeze candidate is specialty retailer player PriceSmart (PSMT), which is set to release numbers on Wednesday after the market close. This company’s business 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 $539.68 million on earnings of 69 cents per share.
The current short interest as a percentage of the float for PriceSmart is rather high at 8.2%. That means that out of the 21.13 million shares in the tradable float, 1.49 million are sold short by the bears. This is another low float high short interest situation, so if the bulls get the news they’re looking for then a decent short-squeeze could develop post-earnings.
From a technical perspective, PSMT is currently trading above both its 50-day and 200-day moving averages, which is bullish. This stock plunged earlier this year from around $70 to a low of $56.31 a share on heavy volume. After that large move lower, the stock recovered quickly and has now run-up to its current price of $72.16. That rebound has pushed PSMT within range of triggering a big breakout trade post-earnings.
If you’re bullish on PSMT here, I would look for long biased trades after its report if it triggers a major break out above some past overhead resistance at $77.50 to $78.40 a share with high-volume. Look for volume that hits close to or above its three-month average volume of 341,365 shares. If we get that action, I would then look for this stock to trend up towards $85 to $90 a share post-earnings.
I would simply avoid PSMT or look for short biased trades after its earnings report if the stock fails to break out and then drops below some near-term support at $71 a share with high-volume. Target a drop back below its 50-day moving average of $68.34 a share, and potentially down to its 200-day moving average of $64.93 a share if the bears hammer this lower 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.
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.