Stock Quotes in this Article: CYBX, GIII, MIND, UNFI, MFRM

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.

    United Natural Foods

    A potential earnings short-squeeze trade is food processing player United Natural Foods (UNFI), which is set to report results on Tuesday before the market open. This company is a distributor of natural, organic and specialty foods and non-food products in the U.S. and Canada. Wall Street analysts, on average, expect United Natural Foods to report revenues of $1.35 billion on earnings of 56 cents per share.

    On Friday, Barclays said it maintains an equalweight on United Natural Foods with a price target of $40. The firm said its keeping its equalweight rating on the stock, due to strong revenue growth as opposed to strong EPS growth. To put it in simple terms, sales have gone up, but gross margins have gone down. The firm also said the new warehouse management system is a positive, but may take years to implement and payoff.

    The current short interest as a percentage of the float for United Natural Foods is notable at 5%. That means that out of the 46.47 million shares in the tradable float, 2.33 million shares are sold short by the bears. The bears have also been increasing their bets from the last reporting period by 7.3%, or by about 158,000 shares.

    From a technical perspective, UNFI is currently trading above both its 50-day and 200-day moving averages, which is bullish. This stock has been uptrending strong for the past six months, with shares soaring from a low of $35.85 to a recent high of $51.92 a share. Now the stock has started to trend sideways for the past month or so, between $51.92 and $48 a share. A move outside of that range post-earnings should setup the next major trend for UNFI.

    If you’re bullish on UNFI, I would wait until after they release earnings. Look for long-biased trades if this stock can manage to trigger a break out above some near-term overhead resistance at $51.39 to $51.92 a share with high-volume. Look for volume on that move that’s close to or above its three-month average action of 254,390 shares. If we get that action, then UNFI will be trading at a new 52-week high, and the stock could easily trend towards $60 a share.

    I would simply avoid UNFI or look for short-biased trades if after earnings it fails to trigger that breakout, and then drops below some near-term support at $48 to $47 a share with high-volume. If we get that action, then UNFI could trend lower toward $45 to $44 a share or possibly down to its 200-day moving average of $42.31 a share.

    G-III Apparel Group

    My first earnings short-squeeze candidate is apparel player G-III Apparel Group (GIII), which is set to release its numbers on Tuesday before the market open. This company designs, manufactures and markets women’s and men’s apparel primarily in the U.S. Wall Street analysts, on average, expect G-III Apparel Group to report revenue of $213.39 million on a loss of 4 cents per share.

    The current short interest as a percentage of the float for G-III Apparel Group is rather high at 13.1%. That means that out of the 15.95 million shares in the tradable float, 2.09 million shares are sold short by the bears. This is a high short-interest on a stock with a very low float. If G-III Apparel Group can deliver what the bulls are looking for, then this stock could experience a sizable short-squeeze post-earnings.

    From a technical perspective, GIII is currently trading below both its 50-day and 200-day moving averages, which is bearish. This stock has been downtrending for the last two months, with shares falling from a high of $29.62 to a recent low of $23.28 a share. During that downtrend, shares of GIII have mostly made lower highs and lower lows, which is bearish technical price action.

    If you’re in the bull camp on GIII, I would wait until after they report. Look for long-biased trades if this stock can manage to move back above its 200-day moving average of $24.78 a share with high-volume. Look for volume on that move that hits near or above its three-month average action of 218,078 shares. If we get that action, then add to any long positions once GIII takes out some near-term overhead resistance at $25.48 and then it 50-day moving average of $26.49 a share.

    I would simply avoid GIII or look for short-biased trades if after earnings this stock fails to trade back above its 200-day at $24.78, and then drops below some near-term support at $23.28 a share with heavy volume. If we get that move, then look for GIII to trend down toward $21.21 a share or much lower if the bears hammer this stock post-earnings.

    Mattress Firm

    One potential earnings short-squeeze trade in the specialty retail complex is Mattress Firm (MFRM), which is set to release numbers on Tuesday after the market close. This company is a specialty retailer of mattresses and related products and accessories in the U.S. Wall Street analysts, on average, expect Mattress Firm to report revenue of $210.76 million on earnings of 25 cents per share.

    Last Friday, Piper Jaffray wrote this in a research note to clients, “We are initiating coverage of MFRM with an Overweight rating and $45 price target, based on 20x our F13E EPS of $2.23. We believe MFRM is well positioned to take market share within the highly fragmented and rapidly growing mattress industry that continues to shift toward specialty/non-innerspring mattresses and away from innerspring mattresses.”

    The current short interest as a percentage of the float for Mattress Firm is extremely high at 43.3%. That means that out of the 9.16 million shares in the tradable float, 3.48 million shares are sold short by the bears. The bears have also been increasing their bets from the last reporting period by 31.7%, or by about 837,000 shares. This is a huge short interest on a stock with a very small float. If Mattress Firm can deliver the numbers that the bulls are looking for, then this stock could easily skyrocket post-earnings.

    From a technical perspective, MFRM is currently trading below its 50-day moving average, which is bearish. During the last month and change, shares of MFRM have been downtrending from a high of $48.18 to a recent low of $31 a share. That move has pushed the stock back below its 50-day moving average of $38.62 a share; that level is now acting has resistance for the past few weeks.

    If you’re bullish on MFRM, then I would wait until after they report and look for long-biased trades if this stock can manage to move back above its 50-day moving average of $38.62, and then above some near-term overhead resistance at $40 a share with high-volume. Look for volume on that move that’s near or above its three-month average action of 257,934 shares. If we get that action, then I would look for MFRM to tag $42 to $44 a share or possibly much higher.

    I would avoid MFRM or look for short-biased trades if the stock fails to maintain a trend above its 50-day at $38.62, and then drops below some major near-term support at $32.70 to $31 a share with high-volume. If we get that move, then look for MFRM to drop back toward $28 to $25 a share if the bears slam this stock down post-earnings.

    Mitcham Industries

    One earnings short-squeeze play in the oil well services and equipment complex is Mitcham Industries (MIND), which is set to release numbers on Tuesday after the market close. This company, through its subsidiaries, engages in the leasing, sale, and service of geophysical and other equipment to the seismic industry worldwide. Wall Street analysts, on average, expect Mitcham Industries to report revenue of $38.23 million on earnings of 83 cents per share.

    If you’re looking for a beaten-down heavily-shorted stock heading into its earnings this week, then make sure to check out shares of Mitcham Industries. So far in 2012, this stock has dropped around 20% with shares getting pounded lower from its April high of $26.44 to today’s low of $17 a share.

    The current short interest as a percentage of the float for Mitcham Industries stands at 5.9%. That means that out of the 11.89 million shares in the tradable float, 708,000 are sold short by the bears. The bears have also been increasing their bets from the last reporting period by 8.4%, or by about 54,600 shares. If the bears are caught leaning too hard into this quarter, then this stock could see a decent short-covering rally.

    From a technical perspective, MIND 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 two months, with shares making mostly lower highs and lower lows, which is bearish technical price action. That move has pushed MIND into oversold territory, since its current relative strength index reading is 32.14. Oversold can always get more oversold, but if we see some post-earnings price strength, then MIND could see a decent short-squeeze.

    If you’re in the bull camp on MIND, I would look for long-biased trades if after they report this stock manages to move back above its 200-day moving average of $18.97, and then above some near-term overhead resistance at $19.383 a share with high-volume. Look for volume on that move that hits near or above its three-month average action of 230,868 shares. If we get that action, then MIND could re-test and possibly take out its 50-day moving average of $21.62 a share.

    I would simply avoid MIND or look for short-biased trades if after earnings the stock fails to sustain a move back above its 200-day at $18.97, and then drops below some past support at $16 a share with high-volume. If we get that action, then MIND could be in for a serious drop back toward $14 to $13 a share if the bears whack this down post-earnings.

    Cyberonics

    My final earnings short-squeeze play is medical equipment and supplies player Cyberonics (CYBX), which is set to release numbers on Wednesday before the market open. This is neuromodulation company engages in the design, development, sale, and marketing of implantable medical devices that provide vagus nerve stimulation therapy for the treatment of refractory epilepsy and treatment-resistant depression. Wall Street analysts, on average, expect Cyberonics to report revenue of $56.61 million on earnings of 35 cents per share.

    If you’re looking for a stock that’s been uptrending pretty strong heading into its earnings report, then make sure to check out shares of Cyberonics. This stock is up 13% so far in 2012, and its currently trending just a few points off of its 52-week high of $40.29 a share. The current short interest as a percentage of the float for Cyberonics is rather high at 9.3%. That means that out of the 23.45 million shares in the tradable float, 2.44 million are sold short by the bears.

    From a technical perspective, CYBX is currently above its 200-day moving average and below its 50-day moving average, which is neutral trendwise. This stock has soared during the last six months, from a low of $23 to a recent high of $40.29 a share. During that run, shares of CYBX have mostly made higher highs and higher lows, which is bullish technical price action. That said, during the last three months, CYBX has been moving sideways between $40.29 on the upside and $35 on the downside. A move outside of that range post-earnings should setup the next major trend for CYBX.

    If you’re bullish on CYBX, I would wait until after they report and look for long-biased trades if this stock triggers a major break out above $39.48 to $40.29 a share with high-volume. Look for volume on that move that’s near or above its three-month average volume of 195,305 shares. If we get that move, then CYBX will be trading in new 52-week high territory, and the stock could hit $45 to $50 in the near future.

    I would simply avoid CYBX or look for short-biased trades if it fails to trigger that breakout, and then drops below some near-term support at $37.23 to $35.75 a share with high-volume. If we get that action, then I would target a drop down toward $34 to possibly its 200-day moving average of $32.96 a share if the bears spark a major selloff 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.