Stock Quotes in this Article: CPWM, GIII, GME, LULU, BONE

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 the stock is acting technically very bullish and you have a very strong conviction that it is going to rip higher.

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

G-III Apparel Group

My first earnings short-squeeze trade idea is apparel player G-III Apparel Group (GIII), which is set to release its numbers on Thursday before the market open. This company designs, manufactures and markets a range of outerwear, women’s sportswear and dresses, including coats, jackets, pants, women’s suits and women’s performance wear. Wall Street analysts, on average, expect G-III Apparel Group to report revenue of $310.78 million on earnings of 29 cents share.

On Tuesday, Stifel Nicolaus raised its price target from $27 to $31 on G-III Apparel Group ahead of its fourth quarter earnings report. Nicolaus expects the fourth quarter to be challenging but thinks investors will be focused on G-III's 2013 outlook.

The current short interest as a percentage of the float for G-III Apparel Group is rather high at 13.2%. That means that out of the 14.34 million shares in the tradable float, 2.09 million shares are sold short by the bears.

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From a technical perspective, GIII is currently trading above both its 50-day and 200-day moving averages, which is bullish. This stock just recently started to move back above its 200-day moving average of $26.20 on decent volume. That move now puts the stock within range of triggering a near-term breakout trade post-earnings.

If you’re bullish on GIII, I would wait until after its report and look for long-biased trades if this stock breaks out above some near-term overhead resistance at $27.41 a share with high volume. Look for volume that’s near or well above its three-month average action of 169,236 shares. If we get that action, then this stock could make a run at its next significant overhead resistance level at $29.75 or possibly higher if the bulls gain full control of GIII post-earnings.

 

I would simply avoid GIII or look for short-biased trades if after earnings this stock fails to break out above $27.41, and then drops below $25.44 to $24.58 (its 50-day) with volume. Target a drop back toward $23.48 or possibly even down to $21 if the bears hammer this stock lower post-earnings.

Bacterin International

One potential earnings short-squeeze candidate in the medical equipment and supplies sector is Bacterin International (BONE), which is set to report results on Thursday after the market close. This company develops, manufactures and markets biologics products to domestic and international markets through Bacterin's biologics division. Wall Street analysts, on average, expect Bacterin International to report revenue of $9.50 million on a loss of 3 cents per share.

If you’re looking for a small-cap stock that’s trading within range of triggering a big breakout post-earnings, then make sure to check out shares of Bacterin International. During the last six months, this stock has been on fire rising over 70%.

The current short interest as a percentage of the float for Bacterin International sits at 4.2%. That means that out of the 22.55 million shares in the tradable float, 992,694 shares are sold short by the bears. This isn’t a huge short interest, but the float is small so any bullish earnings news could easily spark a big short-squeeze for BONE.

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From a technical perspective, BONE 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 number of months, rising from $1.73 to its recent high of $3.54 a share. During that uptrend, shares of BONE have consistently made higher lows and higher highs, which is bullish price action. Now the stock is trading within range of triggering a near-term breakout trade.

If you’re bullish on BONE, I would wait until after its report and look for long-biased trades if the stock breaks out above some near-term overhead resistance at $3.54 a share with high-volume. Look for volume on that move that’s near or well above its three-month average volume of 259,102 shares. If we get that action, then look for BONE to make a run at its November high of $3.93 a share, or possibly towards $4.50 to $4.90 a share, which are past overhead resistance levels.

I would avoid long-biased trades in BONE if this stock fails to break out over $3.65 a share with volume post-earnings. A failure to trigger that breakout could set this stock up to re-test its 50-day moving average of $2.87 or possibly fall lower if the bears slam this stock post-earnings.

Lululemon Athletica

Another earnings short-squeeze candidate is Lululemon Athletica (LULU), which is set to release numbers on Thursday before the market open. This is a designer and retailer of technical athletic apparel operating primarily in North America and Australia. Wall Street analysts, on average, expect Lululemon Athletica to report revenue of $362.37 million on earnings of 49 cents per share.

On Tuesday Jefferies said it would not be surprised to see Lululemon Athletica create more beatable 2012 expectations after it reports fourth quarter earnings. The firm thinks management guidance will create some near-term weakness in the stock, but expects the pullback to be brief. As we approach its quarter, shares of Lululemon Athletica are trading just a few points off its 52-week high of $74.50.

The current short interest as a percentage of the float for Lululemon Athletica is pretty high at 12%. That means that out of the 99.03 million shares in the tradable float, 11.79 million are sold short by the bears. Since this stock is trading so close to its 52-week high, any bullish earnings news could easily spark a big short squeeze.

From a technical perspective, LULU is currently trading above both its 50-day and 200-day moving averages, which is bullish. This stock has been uptrending strong since it bottomed last December at around $41.70 to $42.75 a share. After marking that bottom, the stock has soared towards its current price of just under $73 a share. This strong uptrend how puts LULU within range of triggering a big breakout post-earnings.

If you’re bullish on LULU, I would wait until after it reports earnings and look for long-biased trades if the stock breaks out above its 52-week high of $74.50 a share with heavy volume. Look for volume that’s tracking in close to or above its three-month average action of 2,301,720 shares. If we get that action, then look for LULU to march towards $80 or higher pretty quickly.

I would avoid LULU or look for short-biased trades if the stock fails to break out over $74.50, and then drops below some near-term support at $71.50 a share with volume. Target a drop back towards its 50-day moving average of $65.72 a share, or possibly much lower if the bears sell this stock off hard post-earnings.

Lululemon shows up on a recent list of 10 Best-Performing Stocks in Three-Year Bull Market.

Cost Plus

One earnings short-squeeze candidate in the specialty retail complex is Cost Plus (CPWM), which is set to release numbers on Thursday after the market close. This company is a specialty retailer of casual home furnishings and entertaining products in the U.S. Wall Street analysts, on average, expect Cost Plus to report revenue of $361.81 million on earnings of $1.50 per share.

If you’re looking for a small-cap stock that recently hit a new 52-week high as we approach its earnings report, then make sure to take a hard look at shares of Cost Plus. This stock has been on a tear during the last six months, rising from its October low of $5.57 to its current price of just over $15 a share.

The current short interest as a percentage of the float for Cost Plus is extremely rather high at 10.1%. That means that out of the 17.18 million shares in the tradable float, 1.94 million are sold short by the bears. This is a slow float and decent short interest situation, so any bullish earnings news could easily spark a huge short-squeeze for Cost Plus.

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From a technical perspective, CPWM 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 consistently making higher lows and higher highs, which is bullish price action. That uptrend has now pushed CPWM within range of triggering a big breakout trade post-earnings.

If you’re bullish on CPWM, I would look for long-biased trades after it reports earnings if this stock manages to break out above some near-term overhead resistance at $15.69 to $15.82 a share with strong volume. Look for volume that registers near or above its three-month average volume of 263,313 shares. If we get that action, look for CPWM to march quickly towards $20 a share or higher if the bulls gain full control of this stock post-earnings.

I would avoid CPWM or look for short-biased trades if the stock fails to break out after earnings, and then drops below some near-term support at $14.55 a share with volume. Target a drop back towards some recent support levels at $12.50 to $12 a share if the bears whack this lower post-earnings.

GameStop

Another earnings short-squeeze candidate is GameStop (GME), which is set to release numbers on Thursday before the market opens. This company is a multichannel retailer of video game products and personal computer entertainment software. Wall Street analysts, on average, expect GameStop to report revenue of $3.72 billion on earnings of $1.72 per share.

GameStop met Wall Street estimates last quarter after beating numbers in the prior two quarters. Net income has declined in the last two quarters. Net income fell 23.4% in the second quarter. Revenue went up in the third quarter after it dropped in the prior quarter. In the second quarter, revenue declined 3.1%.

The current short interest as a percentage of the float for GameStop is extremely high at 41.4%. That means that out of the 134.22 million shares in the tradable float, 54.85 million shares are sold short by the bears. The bears have also been increasing their bets from the last reporting period by 8.3%, or by about 4.22 million shares.

From a technical perspective, GME is currently trading above both its 50-day and 200-day moving averages, which is bullish. This stock has been trading inside of a range for the past couple of months, with shares moving from $25.70 on the upside and around $22.50 on the downside. This stock has recently started to move back above both its 50-day of $23.65 and its 200-day of $23.85, and it’s now within range of a near-term breakout trade.

If you’re bullish on GME, I would wait until after it reports earnings and look for long biased trades if it breaks out above some near-term overhead resistance at $24.55 to $25 a share with high-volume. Look for volume on that move that’s near or well above its three-month average volume of 3,245,370 shares. If we get that action, I would look for GME to spike back toward $26.50 to $28 a share post-earnings.

I would avoid GME or look for short-biased trades if it fails to break out post-earnings and then drops below some near-term support at $23.30 a share with heavy volume. If we get that action, target a drop back towards the lower end of its recent range at $21.32 a share or possibly lower if the bears hammer this post-earnings.

To see more potential earnings short squeeze plays, including Wet Seal (WTSLA), Micron Technology (MU) and Dollar General (DG), check out the Earnings Short Squeeze Plays portfolio on Stockpickr.

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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.