Stock Quotes in this Article: CLNE, CREE, INFI, VSI, Z

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.

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.

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    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 -- buy 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.

    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.

    Vitamin Shoppe

    My first earnings short-squeeze play is vitamin and supplement maker Vitamin Shoppe (VSI), which is set to report results on Tuesday before the market open. This company is a specialty retailer and direct marketer of vitamins, minerals, herbs, specialty supplements, sports nutrition and other health and wellness products. Wall Street analysts, on average, expect Vitamin Shoppe to report revenue of $242.15 million on earnings of 51 cents per share.

    If you’re looking for a strong trending stock heading into its earnings report this week, then make sure to check out shares of Vitamin Shoppe. This stock has been soaring so far in 2012 with shares up over 40%, and its currently trading just a few points off its 52-week high of $58.88 a share.

    The current short interest as a percentage of the float for Vitamin Shoppe is notable at 8.5%. That means that out of the 26.22 million shares in the tradable float, 2.26 million shares are sold short by the bears. This is a decent amount of bears in a stock with a relatively low float. If the bulls get the news they’re looking for, then this stock could easily see a massive short-squeeze post-earnings.

    From a technical perspective, VSI is currently trading above both its 50-day and 200-day moving averages, which is bullish. This stock has been uptrending very strong for the past six months, with shares soaring from a low of $41.62 to a recent high of $58.88 a share. During that uptrend, shares of VSI have consistently made higher lows and higher highs, which is bullish technical price action. That move has now pushed VSI within range of triggering a near-term breakout trade.

    If you’re bullish on VSI, then I would wait until after earnings and look for long-biased trades if this stock can manage to trigger a break out above its all-time high of $58.88 a share with high volume. Look for volume on that move that registers near or above its three-month average action of 458,895 shares. If we get that action, then VSI should easily trade north of $60 a share post-earnings.

    I would simply avoid VSI or look for short-biased trades if after earnings it fails to trigger that breakout, and then moves back below its 50-day moving average of $53.51 a share with high volume. If we get that action, then VSI could possibly trade below $50 a share post-earnings.

    Clean Energy Fuels

    Another earnings short-squeeze trade in the alternative energy complex is Clean Energy Fuels (CLNE), which is set to release its numbers on Monday after the market close. This company, together with its subsidiaries, provides natural gas as an alternative fuel for vehicle fleets in the U.S. and Canada. Wall Street analysts, on average, expect Clean Energy Fuels to report revenues of $80.10 million on a loss of 17 cents per share.

    This heavily shorted stock has been beaten down pretty hard during the last four months, with shares dropping from its March high of $24.75 to a recent low of $12.13 a share. The current short interest as a percentage of the float for Clean Energy Fuels is extremely high at 30.5%. That means that out of the 57.52 million shares in the tradable float, 17.48 million shares are sold short by the bears.

    From a technical perspective, CLNE is currently trading below both its 50-day and 200-day moving averages, which is bearish. Following that large drop in March, shares of CLNE have entered a sideways trading pattern for the last two months between $12.13 and $16.75 a share. A move outside of that range post-earnings will likely setup the next major trend for CLNE.

    If you’re in the bull camp on CLNE, then I would wait until after they report earnings and look for long-biased trades if it manages to break out above some near-term overhead resistance levels at $14.39 to $15.32 a share, and then above $16.75 a share with high volume.

    Look for volume on that move that registers near or above its three-month average action of 1,622,350 shares. If we get that move, then CLNE will have a great chance of re-testing and possibly taking out its next major overhead resistance level $19.69 a share.

    I would simply avoid CLNE or look for short-biased trades if after earnings this stock fails to trigger that breakout, and then moves back below some near-term support levels at $13.29 to $13.15 a share with heavy volume. If we get that action, then CLNE will likely re-test and possibly take out its June low of $12.13 a share.

    Zillow

    One potential earnings short-squeeze play is real estate information market place Zillow (Z), which is set to release numbers on Tuesday after the market close. This company provides information about homes, real estate listings and mortgages, through its Web site and mobile applications, enabling consumers connect with real estate and mortgage professionals. Wall Street analysts, on average, expect Zillow to report revenues of $27.14 million on earnings of 4 cents per share.

    This company has beaten Wall Street estimates for the past three quarters in a row. During the last quarter, this company reported a profit of $1.7 million, or 6 cents per share, vs. a loss of $826,000, or 4 cents per share, from the same period a year ago. Revenue jumped more than twofold to $22.8 million from $11.3 million.

    The current short interest as a percentage of the float for Zillow is extremely high at 44.7%. That means that out of the 12.55 million shares in the tradable float, 5.78 million shares are sold short by the bears. The bears have also been increasing their bets from the last reporting period by 5.6%, or by about 306,000 shares. If the bears are caught learning too hard into a solid quarter, then this stock could explode higher as the shorts race to cover some of their positions.

    From a technical perspective, Z is currently trading above both its 50-day and 200-day moving averages, which is bullish. This stock recently hit some resistance and formed a double top at around $44.23 to 44.00 a share. After confirming that topping pattern, the stock traded down to a recent low of $35.57 a share. Following that move, shares of Z have now moved back above its 50-day moving average of $37.37 a share with above average volume.

    If you’re bullish on Z, then I would wait until after they report and look for long-biased trades if this stock can manage to break out above some near-term overhead resistance at $42 to $44.23 a share with high volume. Look for volume on that move that hits near or above its three-month average action of 634,639 shares. If we get that move, then Z should hit $50 or higher post-earnings.

    I would avoid Z or look for short-biased trades if after earnings it fails to trigger that breakout, and then drops below its 50-day moving average of $37.37 a share, and below some near-term support at $35.57 a share with heavy volume. If we get that move, then look for Z to re-test and possibly take out its 200-day moving average of $32.23 a share post-earnings.

    Infinity Pharmaceuticals

    One possible earnings short-squeeze trade in the biotechnology and drugs complex is Infinity Pharmaceuticals (INFI), which is set to release numbers on Tuesday after the market close. This company engages in the discovery and development of medicines for difficult-to-treat diseases. Wall Street analysts, on average, expect Infinity Pharmaceuticals to report revenues of $27.53 million on a loss of 38 cents per share.

    If you’re looking for a strong, uptrending, heavily shorted biotech stock ahead of its earnings report, then make sure to check out shares of Infinity Pharmaceuticals. This stock has been on an absolute tear this year with shares up over 80%, and its currently trading just a few points off its 52-week high of $18.37 a share.

    The current short interest as a percentage of the float for Infinity Pharmaceuticals is very high at 23.6%. That means that out of the 16.35 million shares in the tradable float, 2.81 million shares are sold short by the bears. The short-sellers have also been increasing their bets from the last reporting period by 7.1%, or by about 185,000 shares.

    From a technical perspective, INFI is currently trading above both its 50-day and 200-day moving averages, which is bullish. This stock has been in a monster uptrend for the past six months, with shares soaring from a low of $5.96 to a recent high of $18.37 a share. During that uptrend, shares of INFI have consistently made higher lows and higher highs, which is bullish technical price action. That move has now pushed the stock within range of triggering a near-term breakout trade post-earnings.

    If you’re in the bull camp on INFI, then I would look for long-biased trades after earnings if this stock manages to trigger a near-term break out above its 52-week high of $18.37 a share with high volume. Look for volume on that move that hits near or above its three-month average volume of 252,941 shares. If we get that move, then look for INFI to trade north of $20 a share post-earnings.

    I would simply avoid INFI or look for short-biased trades if after earnings the stock fails to trigger that breakout, and then moves back below some near-term support levels at $16.16 to $14.93 a share, and then below its 50-day moving average of $14.41 a share with heavy volume. If we get that move, then look for INFI to possibly trade down toward $13 to $12 a share post-earnings.

    Cree

    My final earnings short-squeeze play is semiconductor player Cree (CREE), which is set to release numbers on Tuesday after the market close. This company develops and manufactures semiconductor materials and devices primarily based on silicon carbide, gallium nitride and related compounds. Wall Street analysts, on average, expect Cree to report revenue of $306.31 million on earnings of 23 cents per share.

    This company has missed Wall Street estimates for the last three quarters in a row. During the last quarter, Cree reported earnings per share of 20 cents, which fell just short of meeting Wall Street estimates of earnings of 21 cents per share. The current short interest as a percentage of the float for Cree is very high 16.3%. That means that out of the 112.98 million shares in the tradable float, 18.45 million are sold short by the bears.

    From a technical perspective, CREE is currently trading above its 50-day moving average and below its 200-day moving average, which is neutral trendwise. This stock was hit hard by the sellers off its May high of $33.45 to its June low of $22.56 a share. During that move lower, shares of CREE were doing nothing but making lower highs and lower lows, which is bearish technical price action. That said, this stock has started to stabilize during the last two months, with shares now trading between $22.25 and $27.90 a share. A move outside of that range post-earnings will likely setup the next major trend for CREE.

    If you’re bullish on CREE, then I would wait until after they report earnings and look for long-biased trades if it can manage to break out above some near-term overhead resistance at $26.20 to $26.75 a share, and then above more resistance at $27.09 a share with high volume. If we get that action, then CREE could easily trade up towards $30 to $32 a share, or possibly even higher if the bulls gain full control of this stock post-earnings.

    I would simply avoid CREE after earnings if this stock fails to trigger that breakout, and then moves back below its 50-day moving average of $24.07 a share with heavy volume. If we get that action, then look for CREE to re-test and possibly take out its recent low of $22.25 a share.

    To see more potential earnings short squeeze plays, check out the Earnings Short Squeeze Plays portfolio on Stockpickr.

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    -- Written by Roberto Pedone in Winderemere, Fla.

    This article is commentary by an independent contributor, separate from TheStreet's regular news coverage.
    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.