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5 Earning Stocks That Could Get Squeezed Higher - 14343 views
WINDERMERE, Fla. (Stockpickr) --One way to damage to your profit-and-loss statement is to be caught short a stock going into an earnings report when a company delivers a bullish set of numbers.
When this happens, and especially when it happens to an equity that’s already heavily shorted, the market can deliver some true pain as short-covering causes the stock to rip higher. This scenario can create a “perfect storm” for a stock as the natural buyers combined with the short-covering cause a supply-demand imbalance that spikes the stock higher.
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.
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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. First, don’t make a bet big enough to lose sleep over. Keep your bets reasonable and use only 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.
Green Mountain Coffee Roasters
My first earnings short-squeeze play is specialty coffee and coffee maker company Green Mountain Coffee Roasters (GMCR), which is scheduled to release its results on Tuesday after the market close. Wall Street analysts, on average, expect the company to report revenues of $629.35 million on earnings per share of 38 cents.
I like this stock going into the quarter based simply off of its technical strength, with shares trading within range of its all-time high of $67.63 a share. Being that I am a dedicated trend follower, it’s hard to make a case to go against a stock that’s uptrending this strongly ahead of earnings. It doesn’t hurt that the company's K-cup brewers are loved by consumers or that it has recently formed partnerships with Starbucks (SBUX) and Dunkin Donuts.
There is a valuation argument here -- the stock trades at a trailing price-to-earnings of 128 and a forward price-to-earnings of 37 -- but nobody is going to care about that valuation if the company demonstrates superior growth and product penetration in the at-home coffee brewing market.
The current short interest as a percentage of the float for GMCR is a rather large 19.5%. That means that out of the 107.89 million shares that are in the tradable float, 22.39 million are currently sold short by the bears as of April 15. This is a sizable short interest for a stock that’s on the cusp of new highs. Nothing is worse for a short-seller then being short a stock that’s trading into new-high territory.
From a technical standpoint, I would like to see GMCR trading above its nearest overhead resistance price of $67.63 a share prior to its earnings report. If GMCR is trending above that level ahead of its release, that would mean the stock is breaking out and has a good chance of experiencing a big short squeeze if the company can deliver solid results.
My next earnings short-squeeze trade idea is Tesla Motors (TSLA), which is set to report its results on Wednesday after the market close. This company designs, develops, manufactures and sells fully electric vehicles and electric vehicle powertrain components. Wall Street analysts, on average, expect Tesla to report revenue of $43.30 million on a loss of 52 cents per share.
Tesla should be benefiting big from high crude oil prices hitting consumers where it hurts the most: at the pump. Tesla is a market innovator and has been praised in the media recently for building Apple-esque stores to help build its brand. Less than a year ago, Tesla hired a former Apple executive, George Blankenship, who was responsible for creating Apple’s winning retail strategy. Blankenship is now putting his magic to work at Tesla; its first Apple-esque store recently opened in Santa Row in San Jose, Calif.
The current short interest as a percentage of the float TSLA is an extremely large 33.1%. That means that out of the 45.47 million shares in the tradable float, 14.47 million are short by the bears as of April 15. These short-sellers have been increasing their bets from the last reporting period by 10%, or by around 1.3 million shares. That’s a heck of an increase if Tesla beats numbers as I believe it will.
From a technical standpoint, any move ahead of the report where the stock takes out $28 to $29 a share should be viewed as extremely bullish. I love the way this stock is setting up ahead of the quarter, so I would be looking to get long either with options or stock and look for a large short squeeze if Tesla delivers what Wall Street is looking for.
Another earnings short-squeeze candidate is online restaurant reservation company OpenTable (OPEN), which is due to report results on Tuesday after the market close. Wall Street analysts, on average, expect this company to report revenue of $33.46 million on earnings of 23 cents per share.
I am looking for OpenTable to report a solid quarter after it expanded operations into Europe with a recent acquisition. Solid earnings reports during the past few weeks from Amazon.com (AMZN) and Apple (AAPL) are also a good sign for OpenTable. Amazon and Apple are best-of-breed e-commerce and smartphone players, so their strength should bode well for OpenTable during this quarter.
The current short interest as a percentage of the float for OpenTable is a rather large 27.5% as of April 15. That means that out of the 21.23 million shares in the tradable float, 5.75 million are sold short by the bears. These short-sellers have been increasing their bets on OpenTable from the last reporting period by around 6.4%, or by about 345,000 shares. If they’re caught on the wrong side of the trade here, this stock could explode higher.
This is a risky trade, though, since the stock has already run up big ahead of the quarter, with shares up over 50% in 2011. Plus, we’ve seen high-growth names such as Netflix (NFLX) and Deckers Outdoor (DECK) drop hard recently after their reports. With this in mind, it might be best to only trade the options ahead of the report so your risk is defined. It also might be prudent to wait till the day after the report before you jump on the stock so you can gauge the reaction and see how the trend in the stock sets up.
Another stock that’s heavily shorted ahead of its report is Power-One (PWER), a designer and manufacturer of energy-efficient power conversion and power management solutions set to release numbers on Thursday after the market close.
We all know that energy prices are skyrocketing, so it’s very possible that Power-One has seen an uptick in business for the current quarter. It’s even more possible that Power-One will issue bullish guidance as we move into an environment where energy prices might stay at lofty levels for some time to come. Of course, much of this will rely on if management is performing and if they have the right product mix.
The current short interest as a percentage of the float for Power-One is a whopping 34.4% as of April 15. That means that out of the 94.82 million shares in the tradable float, 35.01 million are sold short by the bears. This is another low-float, high-short-interest opportunity that could lead to a big short squeeze if Power-One can deliver solid results.
From a technical standpoint, I like this stock has put in temporary double-bottom at around $7.18 a share. If this stock does start to short-squeeze, then we have the potential to fill a gap down in price from February, when shares fell from $12 to around $9.50 a share. That’s a lot of upside from current levels, so watch for any expanding volume and bullish price action before Power-One reports.
Another stock that could see a big short squeeze off of its earnings report is MercadoLibre (MELI), which is set to report on Wednesday after the market close. This company, through its subsidiaries, hosts online commerce and payments platforms in Latin America. Its services are designed to provide its users with mechanisms to buy, sell, pay for and collect on e-commerce transactions. Wall Street analysts, on average, expect the company to report revenue of $60.03 million on earnings per share of 31 cents.
I think we have a very good chance at a big upside surprise out of MercadoLibre. Many of the emerging markets that it operates in, including Brazil, Chile and Argentina, are experiencing big growth as their middle classes rise and prosper. Much of that growth is due to strong commodity prices, which countries such as Chile are highly leveraged to. Also, booming loan growth and a robust real estate market in Brazil should benefit MercadoLibre as consumers feel the power of the “wealth effect.”
The current short interest as a percentage of the float for MercadoLibre is a rather large 14.8%. That means that out of 27 million shares in the tradable float, 4.33 million shares are sold short by the bears. This is a very high short interest on a stock with an extremely low float. The bears have also increased their bets from the last reporting period by 12.8%, or by around 468,000 shares.
Since this stock is currently within range of $100 a share, I expect a potential short squeeze to push it right through that level. It might not be a bad idea to consider some May 105 calls options so you can participate in any upside with the benefit of knowing how much you can lose in the options.
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.
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.