Stock Quotes in this Article: GES, KITD, ROIAK, RUE, VRA

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.

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

Vera Bradley

My first earnings short-squeeze trade idea is apparel player Vera Bradley (VRA), a designer, producer, marketer and retailer of accessories for women, which is set to release its numbers on Wednesday after the market close. Wall Street analysts, on average, expect Vera Bradley to report revenue of $130.04 million on earnings of 47 cents share.

Jefferies recently said the risk/reward profile on shares of Vera Bradley is favorable at current levels, reiterating its buy rating on the name ahead of the company’s fourth-quarter report. The firm is looking for Vera Bradley to top sales estimates and notes positive news could send the stock meaningfully higher given the high short interest.

The current short interest as a percentage of the float for Vera Bradley is extremely high at 54.5%. That means that out of the 19.93 million shares in the tradable float, 10.86 million shares are sold short by the bears. This stock has a monster short interest and a very low tradable float. If the bulls get the news they’re looking for, then this stock could skyrocket.

From a technical perspective, VRA is currently trading above both its 50-day and 200-day moving averages, which is bullish. This stock has been trading range bound for the past few months between $33 and $39.50 a share. A move outside of that range following its report should set this stock up for its next big trend.

 

If you’re bullish on VRA, I would wait until after its report and look for long-biased trades if this stock breaks out above $38.49 to $39.50 a share with high volume. Look for volume that’s near or well above its three-month average action of 621,820 shares. If we get that action, then this stock has a great chance to spike 10% or more due to its high short-interest.

I would simply avoid this stock from the long side if VRA fails to breakout post-earnings. I would look for short biased trades if VRA takes out its 50-day moving average of $35.46 and then $33 a share with volume. Target a drop back toward $30 to $28.50 if those levels are lost with volume.

Radio One

Another potential earnings short-squeeze trade is broadcasting and cable TV player Radio One (ROIAK), which is set to report results on Thursday before the market open. Wall Street analysts, on average, expect Radio One to report revenue of $103.30 million.

If you’re looking for a small-cap stock that’s trading within range of a near-term breakout as we move close to its earnings report, then make sure to check out shares of Radio One. The current short interest as a percentage of the float for Radio One is rather high at 16%. That means that out of the 25.72 million shares in the tradable float, 4.64 million shares are sold short by the bears.

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From a technical perspective, ROIAK is currently trading above its 50-day moving average and below its 200-day moving average, which is neutral trendwise. This stock recent found some buying interest at 94 cents, which is right above some previous support zones at 91 to 93 cents. The stock has also just started to move back above its 50-day moving average of $1.04 as we head into earnings.

If you’re bullish on ROIAK, I would wait until after they report and look for long biased trades if the stock breaks out above some near-term overhead resistance at $1.08 a share with high-volume. Look for volume that’s tracking in close to or above its three-month average volume of 88,613 shares. If we get that action, then look for a sharp pop in this stock that could take it back towards its 200-day moving average of $1.30.

I would simply avoid ROIAK if this stock fails to break out over $1.08 with volume post-earnings. A failure to trigger that breakout should set this stock up to re-test those big support levels at 94 to 91 cents.

KIT Digital

An earnings short-squeeze play in the computer services complex is KIT Digital (KITD), which is set to release numbers on Thursday before the market open. This company provides end-to-end video asset management software and related services. Wall Street analysts, on average, expect KIT Digital to report revenue of $69.39 million on earnings of 15 cent per share.

If you’re looking for beaten-down heavily shorted stock heading into its quarter, then make sure to check out shares of KIT Digital. This stock was recently dropped from its February high of $12.65 to a low of $8.59 a share in just a few trading sessions on high-volume. Since that drop, the stock has started to move sideways and could breakout post-earnings above some near-term overhead resistance if the company delivers bullish news.

The current short interest as a percentage of the float for KIT Digital is extremely high at 47.7%. That means that out of the 41.01 million shares in the tradable float, 21.13 million are sold short by the bears. The bears have also been increasing their short positions from the last reporting period by 5.3%, or by about 1.06 million shares.

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From a technical perspective, KITD is currently trading below both its 50-day and 200-day moving average, which is bearish This stock has been trading inside of a huge range for the past six months, between $12.65 on the upside and around $8 on the downside. With the stock current trading at around $9 a share, we could be setting up for a spike back towards the upper-end of that trading range.

If you’re bullish on KITD, I would look for long-biased trades after it reports earnings if it can manage to break out above some near-term overhead resistance at $9.40 a share with strong volume. Look for volume that registers near or above its three-month average volume of 783,112 shares. If we get that action, look a monster spike higher in KITD since this stock is so heavily shorted.

I would simply avoid KITD or look for short-biased trades if the stock fails to breakout after they report earnings, and then drops below some near-term support at $8.59 a share with volume. Target a drop back toward the $8 to $7.38 a share if the bears drill this stock post-earnings.

KIT Digital shows up on a list of 13 Tech Stocks to Buy in 2012.

Guess

Another earnings short-squeeze trade is Guess (GES), which is set to release numbers on Wednesday after the market close. This company designs, markets, distributes and licenses apparel and accessories for men, women and children. Wall Street analysts, on average, expect Guess to report revenue of $778.53 million on earnings of $1.05 cents per share.

This company missed Wall Street estimates last quarter, so the bulls will be looking for a better showing for this quarter. Their income has been trending lower year-over-year by an average of 2.3% over the past five quarters. Revenue has now gone up for three straight quarters.

The current short interest as a percentage of the float for Guess is notable at 6%. That means that out of the 66.51 million shares in the tradable float, 4.08 million shares are sold short by the bears. This isn’t a huge short-interest, but it’s more than enough to spark a decent short-squeeze if Guess delivers strong results.

From a technical perspective, GES is currently trading above its 50-day and 200-day moving averages, which is bullish. This stock has been trading range-bound for the last few weeks, between $37 and $33.75 a share. A move outside if that range should set this stock up for its next major trend post-earnings.

If you’re bullish on GES, I would wait until after they report earnings and look for long biased trades if it breaks out today’s highs of $37.15 a share with high-volume. Look for volume that’s tracking in close to or above its three-month average volume of 1,359,960 shares. If we get that action, I would look for a 10% or higher spike in this stock post-earnings.

I would simply avoid GES or look for short biased trades if it fails to breakout post-earnings, and then drops below some near-term support at $35.53 a share with heavy volume. If we get that action, target a drop back towards its 200-day moving average of $33.26 or possibly much lower if the bears slam this stock down post-earnings.

Guess was one of 10 Retail Stock Losers of 2011.

Rue21

Another earnings short-squeeze candidate is specialty apparel retailer Rue21 (RUE), which is set to release numbers on Wednesday after the market close. Wall Street analysts, on average, expect Rue21 to report revenue of $225.80 million on earnings of 49 cents per share.

This company beat Wall Street estimates last quarter by 2 cents, so the bulls will be looking for another solid beat this quarter. Rue21’s profit has trended higher year-over-year by an average of 37.2% over the past five quarters. These strong fundamental results have put the stock just nine points off its 52-week high of $37.33 as we approach its report.

The current short interest as a percentage of the float for Rue21 is extremely high at 33.6%. That means that out of the 15.56 million shares in the tradable float, 5.37 million are sold short by the bears. The bears have also been increasing their bets from the last reporting period by 3.3%, or by about 169,000 shares.

From a technical perspective, RUE is currently trading above its 50-day and 200-day moving averages, which is bullish. This stock has been uptrending strong for the past few months, with shares making mostly higher lows and higher highs, which is bullish price action. That move now puts the stock within range of triggering a big breakout post-earnings if the bulls get the news they’re looking for.

If you’re bullish on RUE, I would wait until after it reports earnings and look for long-biased trades if the stock breaks out above some past overhead resistance at $28.73 to $30.20 a share with heavy volume. Look for volume that’s tracking in close to or above its three-month average action of 331,526 shares. If we get that action, then look for RUE to make a run at $34 a share or possibly higher if the bulls gain full control of this stock post-earnings.

I would avoid RUE or look for short-biased trades if the stock fails to break out over $28.73 to $30.200, and then drops below its 200-day moving average of $26.74 a share with volume. Target a drop back toward its 50-day moving average of $25.18 a share, or possibly much lower if the bears hammer this stock lower post-earnings.

To see more potential earnings short squeeze plays, including Primo Water (PRMW), Nabi Biopharmaceuticals (NABI) and Hanwha Solarone (HSOL), 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.