Stock Quotes in this Article: ARUN, ATW, BKE, MENT, PLCE

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

Short-sellers hate being caught short a stock that announces bullish earning and forward guidance. When this happens, we often see a tradable short squeeze develop as the bears rush to cover their positions and avoid huge losses. Even the most skilled short-sellers know that it’s never a great idea to stay short once an earnings event sparks a big short-covering rally.

 

----------------------------------------------------------

More From Stockpickr

  •  5 Stocks Set to Soar off Bullish Earnings
  • 5 Breakout Stocks to Recoup Your Losses
  • 5 Stocks Setting Up to Break Out
  • --------------------------------------------------------

     

    This is why I scan 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.

    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 from off a short squeeze. When you do this, 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 will miss a lot of the move if you wait. That’s why it can be worth betting prior to the report -- but only 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.

    Aruba Networks

    My first earnings short-squeeze play is global leader in distributed enterprise network solutions Aruba Networks (ARUN), which is set to report its results on Thursday after the market close. Wall Street analysts, on average, expect Aruba Networks to report revenue of $117.37 million on earnings of 14 cents per share.

    For the last couple of months, this stock has been trading in a sideways trading pattern between $20 and $25.50 a share. A move outside of that range to the upside post-earnings will set this stock up for a big breakout.

    The current short interest as a percentage of the float for Aruba Networks is extremely large at 22.3%. That means that out of the 99.03 million shares in the tradable float, 21.46 million are sold short by the bears. This is a very large short interest, so any bullish earnings news could easily set off a monster short squeeze.

    >>5 Stocks Setting Up to Break Out

    From a technical standpoint, this stock is currently trading above its 50-day moving average and below its 200-day moving average, which is neutral trendwise. This stock plunged from its July high of $31.37 to a recent low of $16.20 a share. Since printing that low, the stock has been uptrending nicely and making higher highs and higher lows.

    If you’re bullish on this stock, I would buy some shares after they report earnings if we see a breakout above the upper end of the range at $25.55 and $26.41 (its 200-day) on high volume. Look for volume that’s tracking in close to or above its three-month average action of 3.86 million shares. If we get that breakout, I would target a run back toward that July high at $31.37, or possibly even higher.
    I would get short Aruba after it report its results only if it drops below its 50-day moving average of $22.42 on heavy volume. I would add to any short position if the stock then takes out $20 a share and target a drop back toward $18 to $16 a share if the bears pressure this lower post-earnings.

    Atwood Oceanics

    Another stock with the potential to see an earnings short-squeeze is Atwood Oceanics (ATW), which is set to release results on Thursday after the market close. This company is engaged in the international offshore drilling and completion of exploratory and developmental oil and gas wells. Wall Street analysts, on average, expect Atwood Oceanics to report revenue of $174.66 million on earnings of $1.02 per share.

    This stock is trending strong heading into the quarter since shares are trading just under $44 a share, which is a few points off its 52-week high of $48.84. If Atwood can report a strong quarter and issue bullish guidance, then we have a good chance to see a large short-squeeze.

    The current short interest as a percentage of the float for Atwood Oceanics is worth mentioning at 7.9%. That means that out of the 56.50 million shares in the tradable float, 4.46 million are sold short by the bears. The bears have also been increasing their bets from the last reporting period by 16.9%, or by about 644,000 shares. If the bears are caught leaning too heavy into the quarter, then look for short-covering to push this stock up significantly on any bullish news.

    From a technical standpoint, this stock is currently trading above both its 50-day and 200-day moving averages, which is bullish. This stock was hammered by the sellers from its July high of $48.84 to a recent low of $30.64 a share. Since hitting that low, shares have rebounded sharply to around $44 a share. The stock now sets up for a big breakout over some past overhead resistance at $44.79 to $45.42 off any bullish earnings news.

    If you want to play Atwood for an earnings short-squeeze trade, I would look to get long after it reports earnings if we get that breakout over $44.79 to $45.42 on strong volume. Look for volume that’s tracking in close to or above its three-month average action of 957,100 shares. I would target a run back towards the 52-week high of $48.84, or possibly even higher if the bulls gain full control of this stock post-earnings.

    I would get short this name after it's reported earnings only if the stock drops below its 200-day moving average of $42.22 on heavy volume. I would add to any short position once it then takes out $39 on strong volume. Target a drop below $34 if the bears really pound this lower post-earnings.

    As of the most recently reported quarter, Atwood was one of the top holdings at Columbia Wanger Asset Management.

    Children’s Place Retail Stores

    An earnings short-squeeze play in the retail apparel complex is pure-play children’s specialty apparel retailer Children’s Place Retail Stores (PLCE), which is set to release numbers on Thursday before the market open. Wall Street analysts, on average, expect Children’s Place Retail Stores to report revenue of $469.09 million on earnings of $1.27 per share.

    This is another stock that’s trading in a tight sideways pattern as we get closer to its quarterly report. A move outside of that pattern between $50 and $45 will set this stock up for a big move post-earnings. If that move is above $50, then we are going to see a big short-squeeze since this stock is so heavily shorted.

    The current short interest as a percentage of the float for Children’s Place Retail Stores is massive at 23.7%. That means that out of the 21.34 million shares in the tradable float, 5.85 million are sold short by the bears. This is a low float high short interest situation. Any bullish earnings news and this stock is going to spike big.

    >>5 Retail Stocks to Trade for Gains This Week

    From a technical standpoint, this stock is currently trading right at its 200-day moving average and above its 50-day moving average, which is neutral trendwise. This stock plunged from its July high of $49.93 to a recent low of $36.96 a share. Since marking that low, the stock rebounded big and in early October hit $49.96. The stock is now trading in a sideways pattern as it gets ready to enter its next big trend.

    If you want to play Children's Place for an earnings short-squeeze play, I would look to be a buyer after it reports if we see a breakout above $50 a share on heavy volume. Look for volume that’s tracking in close to or above its three-month average action of 671,800 shares. If we get that breakout post-earnings, then I would target a run back towards the 52-week high of $55.90.

    I would only get short this stock after they have reported earnings if shares drop back below its 50-day moving average of $46.36 on heavy volume. I would then add to any short position if this stock takes out $45 to $44 a share on strong volume. Target a drop back towards $41 to $40 if the bears whack this lower post-earnings.

    Mentor Graphics

    An earnings short-squeeze play in the software and programming complex is Mentor Graphics (MENT), which is set to release numbers on Thursday after the market close. Wall Street analysts, on average, expect Mentor Graphics to report revenue of $244.92 million on earnings of 21 cents per share.

    For the last quarter, this company beat Wall Street estimates by 15 cents, reporting a profit of 8 cents vs. estimates for a net loss of 7 cents per share. That earnings beat was the fourth quarter in row that Mentor has topped estimates. This company has also registered double-digit year-over-year percentage revenue growth for the past four quarters. Over that timeframe, the stock has averaged growth of 24.3%.

    The current short interest as a percentage of the float for Mentor Graphics sits at 3.8%. That means that out of the 92.80 million shares in the tradable float, 4.07 million are sold short by the bears. This is far from a large short interest, but it’s still enough bears involved in the stock to cause a short-squeeze off any bullish earnings news.

    From a technical standpoint, this stock is currently trading above its 50-day moving average and below its 200-day moving average, which is neutral trendwise. This stock dropped sharply from its July high of $13.08 to a recent low of $8.50. Since hitting that low, the stock has rebounded and now trades near $11.50 a share.

    If you’re bullish on this stock, I would wait until after its report and buy the stock once it breaks out above $11.71 and $12.56 (its 200-day) on strong volume. Watch for volume that’s tracking in close to or above its three-month average action of 1.13 million shares. If we see that breakout, then I would add to any long position once the stock takes out more overhead resistance at $13.08 a share. Target a run back towards $15 to $16.50 if the bulls gain full control of this stock post-earnings.

    I would short Mentor after earnings only if the stock drops back below its 50-day moving average of $10.45 on heavy volume. Target a drop back towards $9 to $.8.50 if the bears hammer this lower post-earnings.

    Mentor Graphics is one of the top holdings of Private Capital Management.

    Buckle

    One more earnings short-squeeze idea is retailer of casual apparel, footwear and accessories for men and women the Buckle (BKE), which is set to release its numbers on Thursday before the market open. Wall Street analysts, on average, expect the Buckle to report revenue of $269.68 million on earnings of 80 cents per share.

    This is another name that’s trending strong going into the quarter since shares are trading near $43 a share, which is just a few points off its 52-week high of $47.97. A strong quarter and bullish guidance will set this stock up for a big breakout post-earnings.

    The current short interest as a percentage of the float for the Buckle is extremely large at 21.2%. That means that out of the 26.45 million shares in the tradable float, 5.74 million are sold short by the bears. This is another situation of a stock with a very low float and extremely high short interest. Any strength after earnings in this stock could lead to a large spike higher as the bears rush in to cover some of their bets.

    From a technical standpoint, the stock is currently trading above its 50-day and 200-day moving averages, which is bullish. The stock was hammered from its July high of $44.13 to a recent low of $32.13 a share. Since printing that low, the stock has been doing nothing but uptrending strong and making higher highs and higher lows.

    I would look to be a buyer of Buckle after earnings if it can manage to break out above $44.22 to $46 a share on strong volume. Look for volume that’s tracking in close to or above its three-month average action of 601,600 shares. If that breakout triggers, then this stock is going to start moving into all-time high territory, which is very bullish for any equity.

    I would get short this stock after earnings only if it drops below its $40.21 (50-day) and $38.98 (200-day) on heavy volume. A high-volume move below those levels should set this stock up to trade back down towards $35 a share, or possibly even lower if the bears pound this stock post-earnings.

    To see more potential earnings short squeeze candidates, including Salesforce.com (CRM), Dollar Tree (DLTR) and Perry Ellis International (PERY), check out the Earnings Short Squeeze Plays portfolio on Stockpickr.

    -- Written by Roberto Pedone in Winderemere, Fla.

    RELATED LINKS:

    >>11 High-Yield, High-Momentum Stocks
    >>6 Stocks Poised for Stunning Profit Growth

    >>3 High-Yield Debt-Free Stocks

    Follow Stockpickr on Twitter and become a fan on Facebook.

    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.