Stock Quotes in this Article: FRED, RUE, SMTC, TIF, TOL

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.

Tiffany

My first earnings short-squeeze trade idea today is high-end specialty retailer Tiffany (TIF), which is set to release its numbers on Thursday before the market open. This company, through its subsidiaries, engages in the design, manufacture, and retail of fine jewelry worldwide. Wall Street analysts, on average, expect Tiffany to report revenue of $816.85 million on earnings of 69 cents per share.

This company missed estimates last quarter after beating Wall Street estimates in the prior two quarters. During the fourth quarter of the last fiscal year, Tiffany reported net income of $1.39 per share against Wall Street estimates of a $1.42 per share. This company is looking to register its fifth-straight quarter of positive revenue increases. Revenue jumped 20.1% in the first quarter of the last fiscal year, 30.5% in the second quarter of the last fiscal year and 20.5% in the third quarter of the last fiscal year.

On Monday, Sterne Agee reiterated its buy rating on Tiffany with an $83 price target. Agee said: “Tiffany is on sale, although we note that comparisons remain challenging through Q3. Its valuation at 13.3x FY13 estimates is below its historic average on forward earnings of 18.3.”

The current short interest as a percentage of the float for Tiffany is worth mentioning at 5.1%. That means that out of the 115.64 million shares in the tradable float, 6.38 million shares are sold short by the bears. The bears have also been increasing their bets from the last reporting period by 8.6%, or by about 503,000 shares. If the bears are leaning too hard into this quarter, then shares of Tiffany could see a sizable short-squeeze if the report strong results.

From a technical perspective, TIF is currently trading below both its 50-day and 200-day moving averages, which is bearish. This stock has sold off hard during the last two months, with shares dropping from a high of $74.20 to a recent low of $60.03 a share. That selloff has pushed TIF into oversold territory since its current relative strength index reading is now 33.69. Oversold can always get more oversold, but if TIF sees any strength post-earnings it could rebound sharply.

If you’re bullish on TIF, I would wait until after its report and look for long-biased trades if this stock can take out some near-term overhead resistance at $62 to $63.28 a share with high-volume. Look for volume on that move that hits near or above its three-month average action of 2,100,770 shares. If we get that action, look for TIF to re-test its $65 to its 50-day moving average of $67.29 a share if the bulls gain full control of this stock post-earnings.

I would simply avoid TIF or look for short-biased trades if after earnings this stock fails to trigger that move, and then drops back below some major near-term support levels at $60.03 to $58.36 a share with heavy volume. Target a move back towards some previous support at $55.70 to $53.44 a share or possibly lower if the bears spark a notable selloff post-earnings.

Tiffany shows up on a list of 12 Highest-Rated Consumer Stocks Picked by S&P.

Semtech

Another potential earnings short-squeeze play is semiconductors player Semtech (SMTC), which is set to report results on Wednesday after the market close. This company is a supplier of analog and mixed-signal semiconductor products. Wall Street analysts, on average, expect Semtech to report revenue of $119.94 million on earnings of 31 cents per share.

If you’re looking for a beaten-down tech stock with a decent short interest ahead of its earnings, then make a strong look at shares of Semtech. During the last four months, this stock has dropped from its high of $30.48 to a recent low of $23.78 a share. That beat-down has pushed shares of Semtech into oversold territory since its current RSI reading is 34.61.

The current short interest as a percentage of the float for Semtech stands at 5.1%. That means that out of the 63.45 million shares in the tradable float 3.49 million shares are sold short by the bears. This isn’t a huge short interest, but it’s more than enough to spark a solid spike higher if the bulls get the news they’re looking for out of Semtech.

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From a technical perspective, SMTC is currently trading below both its 50-day and 200-day moving averages, which is bearish. During the last four months, this stock has been trending lower with shares consistently making lower highs and lower lows, which is bearish price action. That said, SMTC has started to find some buying interest recently off some previous support zones at $23 a share.

If you’re in the bull camp on SMTC, I would wait until after it releases earnings and target long-biased trades if it can manage to break out above its 200-day moving average of $25.04, and then some near-term overhead resistance at $25.58 with high-volume. Look for volume on that move that registers close to or well above its three-month average volume of 496,240 shares. If we get that action, then SMTC could hit its 50-day moving average of $27 or possibly some past resistance at $28.18 to $29.26 a share.

I would simply avoid SMTC or look for short-biased trades if after earnings this stock fails to trigger that move back above its 200-day, and then takes out some near-term support at $23.78 to $22.10 a share with heavy volume. If we get that action, then this stock could easily drop back below $20 a share post-earnings.

Toll Brothers

One potential earnings short-squeeze play in the home building complex is Toll Brothers (TOL), which is set to release numbers on Wednesday before the market open. This company designs, builds, markets and arranges financing for single-family detached and attached homes in luxury residential communities. Wall Street analysts, on average, expect Toll Brothers to report revenue of $381.96 million on earnings of 4 cents per share.

This company missed Wall Street estimates last quarter after beating estimates in the prior quarter. During the first quarter, Toll Brothers reported a loss of 2 cents per share vs. Wall Street estimates of 3 cents per shares. Over the last four quarters, revenue has trended lower by an average of 2% year over year. The biggest drop occurred in the third quarter of the last fiscal year, when it dropped 13.2%.

The current short interest as a percentage of the float for Toll Brothers is rather high at 10.3%. That means that out of the 148.24 million shares in the tradable float, 15.36 million shares are sold short by the bears. The bears have also been increasing their bets from the last reporting period by 18.1%, or by about 2.35 million shares.

From a technical perspective, TOL 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 $18.95 to a recent high of $27.80 a share. During that uptrend, shares of TOL have mostly made higher lows and higher highs, which is bullish technical price action. That move has how pushed TOL within range of triggering a major breakout trade post-earnings.

If you’re a bullish on TOL, then I would wait until after they report and look for long-biased trades if this stock can trigger a break out above its 52-week high of $27.80 a share with high volume. Look for volume on that move that registers close to or above its three-month average volume of 3.8 million shares. If we get that action, then shares of TOL should easily trade north of $30 a share if the bulls jump into this stock post-earnings.

I would avoid TOL or look for short-biased trades if the stock fails to trigger that breakout, and then drops back below its 50-day moving average of $24.65 a share with high volume. Target a move lower back below some near-term support at $23 to its 200-day moving average of $20.50 a share if the bears hammer this stock lower post-earnings.

Toll Brothers was also featured recently in "7 Stocks With Relative Strength to Beat the Market."

Fred’s

An earnings short-squeeze candidate in the department and discount store complex is Fred’s (FRED), which is set to release numbers on Thursday before the market open. This company is engaged in the sale of general merchandise through its retail discount stores and full-service pharmacies. Wall Street analysts, on average, expect Fred’s to report revenue of $500.86 million on earnings of 27 cents per share.

If you’re looking for a heavily shorted stock that’s trading within range of triggering a major breakout trade post-earnings, then make sure to check out shares of Fred’s ahead of its earnings report this week. During the last six months, shares of Fred’s have trended up 17.6% and the stock is just one point off its 52-week high of $15.27 a share.

The current short interest as a percentage of the float for Fred’s is very high at 16.6%. That means that out of the 34.17 million shares in the tradable float, 5.68 million are sold short by the bears. This stock could rip sharply higher post-earnings due to its low float and high short interest. All the bulls will need is for Fred’s to report solid earnings and bullish forward guidance.

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From a technical perspective, FRED is currently trading above both its 50-day and 200-day moving averages, which is bullish. During the last four months, this stock has been trending sideways between $13.12 on the downside and $15.20 on the upside. A high-volume move outside of that range post-earnings should set this stock up for its next major trend.

If you’re in the bull camp on FRED, I would look for long-biased trades after they report if this stock manages to trigger a break out above some near-term overhead resistance at $15.20 a share with high-volume. Look for volume on that move that registers near or close to its three-month average action of 248,521 shares. If we get that move, then look for FRED to spike 15% or more post-earnings.

I would simply avoid FRED or look for short-biased trades if the stock fails to trigger that breakout, and then drops back below some near-term support at $14 to $13.75 a share with high-volume. Target a drop towards its 200-day moving average of $13.10 a share or possibly down to $12 a share if the bears spark a big-time selloff post-earnings.

Rue21

My final earnings short-squeeze play today is specialty apparel retailer Rue21 (RUE), which is set to release numbers on Thursday after the market close. This company provides fashion apparel and accessories for girls and guys, including graphic T-shirts, denim, dresses, shirts, hoodies, belts, jewelry, handbags, footwear, intimate apparel, and other accessories. Wall Street analysts, on average, expect Rue21 to report revenue of $204.10 million on earnings of 43 cents per share.

If you’re looking for a strong uptrending and heavily shorted stock heading into its earnings report this week, then make sure to check out shares of Rue21. This stock has been blazing a path on the upside so far in 2012, with shares up over 26%.

The current short interest as a percentage of the float for Rue21 is extremely high at 27.1%. That means that out of the 16.07 million shares in the tradable float, 14.20 million are sold short by the bears. This is a huge short interest on a stock with a very low float. If Rue21 can deliver the results the bulls are looking for, then this stock could easily see a monster short-squeeze post-earnings.

From a technical perspective, RUE is currently trading below its 50-day moving average and above its 200-day moving average, which is neutral trendwise. This stock has been uptrending strong for the past six months, with shares exploding higher from a low of $19.69 to a recent high of $31.97 a share. During that uptrend, shares of RUE have consistently made higher lows and higher highs, which is bullish technical price action. That said, this stock just sold off at the start of May back below its 50-day moving average on heavy volume.

If you’re bullish on RUE, I would wait until after its report and look for long-biased trades if this stock can manage to trigger a near-term break out above its 50-day at $28.82, and above some near-term overhead resistance at $28.97 a share with high-volume. Look for volume on that move that hits near or well above its three-month average volume of 297,038 shares. If we get that action, then RUE could easily re-test its recent high of $31.97 a share, or possibly hit its next major resistance area at $34 a share.

I would simply avoid RUE or look for short-biased trades if it fails to trigger that move, and then drops below some near-term support at $26.56 a share, and then under its 200-day moving average of $25.84 a share with high-volume. If we get that action, then look for RUE to drop sharply back toward $24 to $22 a share or possibly lower if the bears smack 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.