Stock Quotes in this Article: ADTN, CBST, PPHM, TXI, NH

 WINDERMERE, Fla. (Stockpickr) -- News events have the power to create massive volatility in stocks, and one event that can move them substantially higher or lower is an earnings release. Take that one step further and combine a bullish earnings report with a stock that’s heavily shorted, and you have the fuel that can ignite a large short squeeze.

Short-sellers hate being caught short a stock that produces earnings that please the bulls on Wall Street. When this happens, we often see tradable short squeezes develop as the bears rush to cover their positions and avoid even bigger losses. Even the best short-sellers know that it’s never a good idea to stay short once a big short-covering rally is sparked by an earnings event.

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. It’s important that you don’t go betting the farm on these plays and manage your risk accordingly. Sometimes the best play is to wait for the stock to breakout 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.

    However, sometimes the stock is going to be in such high demand that you will miss a lot of the move. That’s why it’s only worth betting prior to the report if you have a very strong conviction that the stock is going to explode higher.

    Here’s a look at a number of stocks that could experience big short squeezes when they report earnings this week.

     

    Texas Industries

    My first earnings short-squeeze candidate is Texas Industries (TXI), which is set to report its results on Thursday before the market open. This company is a supplier of heavy construction materials in the U.S. Texas Industries operates in three segments: cement, aggregates and consumer products. Wall Street analysts, on average, expect this company to report revenue of $174.76 million on a loss of 26 cents per share.

    If Texas Industries can produce a solid report, it will mark the fourth consecutive quarter the company has beaten analysts’ expectations. The one issue here is whether TXI will be able to outperform if public construction slows down due to the potential of federal spending cuts. If that’s the case, then this could be the last chance for a bullish quarter for quite some time from TXI.

    The current short interest as a percentage of the float for TXI is a rather large 21.7%. That means that out of the 21.72 million shares in the tradable float, 4.72 million are sold short by the bears. The short-sellers have also added to their bets recently by 5%, or by about 226,000 shares. If the bears are caught leaning the wrong way here, then this stock could easily see some short-covering that pushes it notably higher.

    From a technical standpoint, TXI was one of the few stocks that went up during Monday’s huge market slide. And the stock didn’t just go up -- it went up on very strong volume. Volume on Monday registered over 438,000 shares, which is well above the three-month average volume of 176,600 shares.

    The way I would play TXI is to wait for the company to report and then buy the stock if you see it trade above $42 to $43 a share. If the stock takes out $43 following earnings, I would then add aggressively to any long position since the next overhead resistance level wouldn’t be hit until $46.37 a share. I would only short this stock if it takes out $39 a share with strong volume following the report or right before earnings are released.

    Texas Industries shows up on a recent list of 6 Cement Stocks Worth Buying.

    Cubist Pharmaceuticals

    Another potential earnings short squeeze play is Cubist Pharmaceuticals (CBST), which is set to report results on Thursday after the market close. This is a biopharmaceutical company focused on the research, development and commercialization of pharmaceutical products that address unmet medical needs in the acute care environment. Wall Street analysts, on average, expect Cubist to report revenue of $174.82 million on earnings of 41 cents per share.

    Cubist is my favorite earnings short-squeeze play right now because the company beat on both the top and bottom lines last quarter, and the stock traded up over 5%. Over the last four quarters, revenue has risen 12.9% on average year over year.

    The current short interest as a percentage of the float for CBST is high at 14.2%. That means that out of the 56.58 million shares in the tradable float, 8.5 million are sold short by the bears. It’s worth noting that the short-sellers have been increasing their bets from the last reporting period by 4.2%, or by about 344,000 shares. Any good news out of CBST, and the stock should rip higher as the shorts run to cover their bets.

    From a technical standpoint, shares of CBST just broke below their 50-day moving average of $35.69, which is a bearish technical sign. The only thing good about the fall below the 50-day, is that it came on lighter than average volume. As long as the stock can recover and get back above the 50-day, either prior to or after the report, then a long trade here could still be in play.

    The way I would play CBST is to buy the stock only if it takes out $37.19 after reporting earnings. Do not buy this stock ahead of the report since it just recently broke below the 50-day. I would add to any long position aggressively if you see the stock break out above $39.29 after earnings. I would only short this stock if it breaks below $33.40 after the report. A break below that level would be very bearish since it’s an area at which the stock has formed a doubled bottom in the past few months.

    Cubist is one of TheStreet Ratings' top-rated biotech stocks.

    NovaGold

    One earnings short-squeeze play in the precious metals sector is NovaGold (NG), which is set to release numbers on Wednesday after the close. This precious metals company is engaged in the exploration and development of mineral properties situated principally in Alaska, the U.S. and British Columbia, Canada. There are currently no analyst estimates for NovaGold.

    Gold prices have remained steady so far in 2011 as seen by the returns in the SPDR Gold Trust (GLD), which is up over 9.2%. This should bode well for NovaGold as long as management can forecast a strong production outlook.

    The current short interest as a percentage of the float for NG sits at around 6.9%. That means that out of the 143.33 million shares in the tradable float, 12.49 million are sold short by the bears. This is a high enough short interest that could spark a big short squeeze if NG reports a strong quarter.

    From a technical standpoint, this stock has been absolutely annihilated so far in 2011, with shares falling from a high of $14.85 to its current price of $9.60 a share. The stock found some buying support a few weeks ago at $8.40 a share, but it just hit some selling resistance at the 50-day moving average of $10.35.

    The way I would play this name into the quarter, is to wait for the NG to report and only buy the stock if it takes out the $10.35 on strong volume. I would add to any long position above $11.65 and then add again if the stock moves above the 200-day moving average of $12.31. I would only short this stock after they report if shares fall below $8.40 on volume.

    NovaGold is one of the top holdings of John Paulson's Paulson & Co. and also shows up in George Soros' portfolio.

    Adtran

    One earnings short squeeze play in the communications equipment sector is Adtran (ADTN), which is set to release numbers on Tuesday after the market close. This company designs, manufactures, markets and services network access solutions for communications networks. Wall Street analysts, on average, expect Adtran to report revenue of $179.44 million on earnings of 53 cents per share.

    This company has beaten analysts’ expectations for the past four consecutive quarters. Its profits have jumped year over year by an average of 69.4%. Stifel Nicolaus wrote in a recent report: “We expect ADTRAN to report its June quarter above Street consensus of $179.4 million. Our checks show that ADTRAN experienced strong momentum with its Opti and broadband access products.” Niccolaus slapped a buy rating on the stock with a $48 price target.

    The current short interest as a percentage of the float for ADTN is notable at 8%. That means that out of the 64.49 million shares in the tradable float, 4.81 million are sold short by the bears. It’s worth noting that the short-sellers have been increasing their bets from the last reporting period by 11.2%, or by about 484,000 shares. This is a large increase, so if ADTN can beat and raise guidance, then a short squeeze could materialize.

    From a technical standpoint, ADTN is trading right around its 50-day moving average of $40.40 a share. The stock has run into some stiff resistance recently at around $43.50 to $42.50 share, and shares of slid down from a March highs of $47.50 to current levels.

    The way I would play ADTN is to wait for them to report earnings then buy the stock if you see it break above $42.50 to $43.50 a share. I would add aggressively if you see ADTN take out $45.35 and then add again if it breaks out about $47.59 a share. I would only short this stock if it drops below the 200-day moving average of $38.78 following the report on strong volume.

    Adtran is one of TheStreet Ratings' top-rated communications equipment stocks.

    Peregrine Pharmaceuticals

    One final earnings short squeeze play is Peregrine Pharmaceuticals (PPHM), which is set to release numbers on Thursday after the market close. This clinical-stage biopharmaceutical company develops monoclonal antibodies for the treatment of cancer and viral infections. Wall Street analysts, on average, expect Peregrine to report revenue of $2.28 million on a loss of 15 cents per share.

    Market players are going to want to watch what PPHM’s management has to say about Phase II survival data for its treatment of non-small cell lung cancer. Any positive comments on the conference call could send the stock soaring

    The current short interest as a percentage of the float for PPHM is a reasonable 5%. That means that out of the 63.16 million shares in the tradable float, 3.35 million are sold short by the bears. This is more than enough shorts in a stock to spur a short squeeze if PPHM reports a solid quarter and guides higher.

    From a technical standpoint, shares of PPHM are currently trading below both its 50-day and 200-day moving averages, which is bearish. That said, the stock has recently rebounded off its lows around $1.56, and it has been making higher lows and higher highs for the past two months. This could mean the stock is entering a new bullish uptrend, so a strong earnings report could be the catalyst to continue that trend.

    I would be a buyer of this stock if it takes out the 50-day ($2.03) and the 200-day ($2.06) moving averages following their earnings report. I would add aggressively to any long position above $2.16 and then add again above $2.30 a share. Look for confirmation of a move higher if the upside volume is strong, clocking in well above the three-month average action of 346,800 shares.

    Peregrine shows up on a recent list of 10 Pharma Stocks Under $3.

    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.

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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.