Stock Quotes in this Article: CHKE, FAST, INDB, JBHT, OZRK

WINDERMERE, Fla. (Stockpickr) -- Short-sellers hate being caught short a stock that produces earnings that please the bulls. 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.

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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 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.

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 -- but only if you have a very strong conviction that the stock is going to rip higher, and its acting technically very bullish.

With that in mind, here’s a look at several stocks that could experience big short squeezes when they report earnings this week.

Bank of the Ozarks

My first earnings short-squeeze play is regional banking player Bank of the Ozarks (OZRK), which is set to release its numbers on Thursday after the market close. Wall Street analysts, on average, expect Bank of the Ozarks to report revenue of $60.22 million on earnings of 51 cents share.

If you’re looking for a heavily shorted strong-trending banking name, then make sure to check out shares of Bank of the Ozarks ahead of its earnings report. This stock is trading just one point off if its 52-week high of $32.26 ahead of its quarter.

The current short interest as a percentage of the float for Bank of the Ozarks is rather high at 12.1%. That means that out of the 29.29 million shares in the tradable float, 3.54 million shares are sold short by the bears. The bears have also been increasing their short positions from the last reporting period by 3.2%, or by about 108,000 shares. This is a low float high short-interest situation, so any bullish earnings news could easily spark a large short-covering rally post-earnings.

From a technical perspective, OZRK is currently trading above both its 50-day and 200-day moving averages, which is bullish. This stock has been uptrending strong for the last six months, since shares of advanced from a low of $22.94 to its recent 52-week high of $32.26 a share. During that uptrend, the stock has consistently made higher lows and higher highs, which is bullish price action.

If you’re bullish on OZRK, I would wait until after they report and look for long biased trades if this stock breaks out to a new 52-week high above $32.26 a share with high-volume. Look for volume that’s near or well above its three-month average action of 223,781 shares. If we get that action, then look for OZRK to make a run at $35 to $40 a share if the bulls gain full control of this stock post-earnings.

I would simply avoid OZRK or look for short biased trades if after earnings this stock fails to break out to a new 52-week high, and then drops below its 50-day moving average of $30.15 a share with heavy volume. Target a drop back towards $28 to $27 a share or possibly lower if the bears spark a notable selloff post-earnings.

Bank of the Ozarks shows up on a recent list of 9 Stocks That Prove Dividends Make All the Difference.

Cherokee

One potential earnings short-squeeze trade in the apparel complex Cherokee (CHKE), which is set to report results on Thursday after the market close. There are currently no analysts’ estimates available for Cherokee.

The current short interest as a percentage of the float for Cherokee is decent at 9%. That means that out of the 7.07 million shares in the tradable float, 683,540 shares are sold short by the bears. The bears have also been increasing their bets from the last reporting period by 11.3%, or by about 121,000 shares.

From a technical perspective, CHKE is currently trading above both its 50-day and 200-day moving averages, which is bullish. This stock hit a recent low in late January at $9.97, and since then has run-up towards its current price of just over $12.50 a share. That move has now pushed CHKE within range of triggering a breakout trade post-earnings if the company can deliver what the bulls are looking for.

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If you’re bullish on CHKE, I would wait until after they report and look for long biased trades if the stock breaks out above some overhead resistance at $12.94 to $13.07 a share with high-volume. Look for volume on that move that’s near or above its three-month average volume of 48,737 shares. If we get that action, then look for CHKE to make a run at $14 to $16 a share.

I would simply avoid CHKE or look for short biased trades if after earnings that breakout never triggers, and the stock drops back below its 200-day at $12.59 a share with heavy volume. If we get that move, look for CHKE to drop back towards its 50-day moving average of $11.28 or possibly lower if the bears spark a notable selloff post-earnings.

Fastenal

Another potential earnings short-squeeze trade is industrial and construction supplies retailer Fastenal (FAST), which is set to release numbers on Thursday before the market open. Wall Street analysts, on average, expect Fastenal to report revenue of $768.56 million on earnings of 35 cents per share.

This company met Wall Street estimates last quarter after beating estimates in the previous two quarters. Fastenal is aiming to continue its streak of solid results for its top line. Revenue has trended higher by double digits in each of the last four quarters with an average growth of 22%. The company is also going for its fourth straight quarter of income increases. Net income jumped 36.1% in the second quarter of the last fiscal year and 29.1% in the third quarter before trending higher in the fourth quarter.

The current short interest as a percentage of the float for Fastenal stands at 6.8%. That means that out of the 269 million shares in the tradable float, 18.42 million are sold short by the bears.

From a technical perspective, FAST is currently trading above its 200-day moving average and below its 50-day moving average, which is neutral trendwise. This stock has been uptrending strong for the last six months, with shares jumping from under $40 a share to a recent high of $55.05 a share. That said, the stock recently broke back below its 50-day moving average of $51.67 on heavy volume.

If you’re bullish on FAST, I would wait until after they report earnings and look for long biased trades if this stock can break back above its 50-day moving average of $51.68 with high-volume. Look for volume on that move that registers close to or above its three-month average volume of 2.3 million shares. If we get that move, then look for FAST to make a run at its recent high of $55.05 a share.

I would avoid FAST or look for short biased trades if the stock fails to get back above its 50-day, and then drops below some near-term support at $48.83 a share with high-volume. Target a drop towards $44 to $42 a share or possibly lower if the bears spark a big selloff in FAST post-earnings.

Fastenal, one of 9 Stocks That Prove Dividends Make All the Difference, also shows up on a list of 10 Stocks Leading the Way in the Housing Recovery.

Independent Bank

One earnings short-squeeze candidate in the regional banking complex is Independent Bank (INDB), which is set to release numbers on Thursday after the market close. Wall Street analysts, on average, expect Independent Bank to report revenue of $55.63 million on earnings of 50 cents per share.

If you’re looking for a banking stock that’s trending very strong heading into its quarter, then make sure to check out shares of Independent Bank. This stock is currently trading just a few points off its 52-week high of $29.99 as we approach its earnings report.

The current short interest as a percentage of the float for Independent Bank is rather high at 13.2%. That means that out of the 20.49 million shares in the tradable float, 2.69 million are sold short by the bears. This stock has a low float and a pretty decent short interest. Any bullish earnings news could easily spark a sizeable short-squeeze.

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From a technical perspective, INDB is currently trading above its 200-day moving average and just below its 50-day moving average, which is neutral trendwise. This stock has been trading range bound for the last few months between $26.18 and $29.57 a share. A move outside of that range post-earnings will most likely setup the next big trend for INDB.

If you’re bullish on INDB, I would look for long-biased trades after they report if this stock manages to move back above its 50-day moving average of $28.03, and break out above some near-term overhead resistance at $29.57 a share with strong volume. Look for volume on that move that’s near or above its three-month average action of 57,377 shares. If we get that action, then look for INDB to make a run into the mid-30s.

I would simply avoid INDB or look for short biased trades if the stock fails to trigger that breakout, and then drops back below some near-term support at $27.19 with high-volume. Target a drop back towards its 200-day moving average of $25.66 a share or possibly lower if the bears hammer this stock down post-earnings.

J.B. Hunt Transport Services

My final earnings short-squeeze idea is trucking and transportation logistics player J.B. Hunt Transport Services (JBHT), which is set to release numbers on Thursday after the market close. Wall Street analysts, on average, expect J.B. Hunt Transport Services to report revenue of $1.15 billion on earning of 52 cents per share.

This company is shooting for its eighth straight quarter of double-digit earnings and sales growth. As we approach their report, the stock is trending very strong and trading just a few points off its 52-week high of $56.09.

The current short interest as a percentage of the float for J.B. Hunt Transport Services sits at 4.8%. That means that out of the 90.12 million shares in the tradable float, 4.35 million shares are sold short by the bears. The bears have also been increasing their bets from the last reporting period by 6.7%, or by about 274,000 shares.

From a technical perspective, JBHT is currently trading above both its 50-day and 200-day moving averages, which is bullish. This stock has been trending strong for the last six months, rising from a low of $40.40 to its recent 52-week high of $56.09 a share. That move now has JBHT within range of triggering a major breakout post-earnings.

If you’re a bull on JBHT, I would wait until after its report and look for long-biased trades if the stock breaks out to a new 52-week high above $56.09 a share with high-volume. Look for volume on that move that’s near or well above its three-month average action of 884,405 shares. If we get that action, look for JBHT to make a run at $60 a share or possibly much higher.

I would simply avoid JBHT or look for short biased trades if it fails to print a new 52-week high, and then sells off with heavy volume below its 50-day moving average of $52.73 a share. If we get that action, look for JBHT to drop towards $50 to $48 a share or possibly lower if the bears whack this stock down 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.