Stock Quotes in this Article: LRCX, SNDK, TER, TZOO, UA

 
WINDERMERE, Fla. (Stockpickr) -- With earnings season getting underway on Wall Street, it’s time for market-players to create a powerful watch list of stocks due to report numbers that are also heavily shorted by the bears.

Short-sellers hate being caught short a stock that produces earnings that please the bulls. When this happens, we often see 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 extremely bullish technically and you have a very strong conviction that it is going to rip higher.

Yesterday I highlighted five earnings-related short-squeeze plays. Here’s a look at five more stock that could experience big short squeezes when they report earnings this week.

SanDisk

My first earnings short-squeeze idea is computer storage device maker SanDisk (SNDK), which is set to report its numbers on Wednesday after the close. Wall Street analysts, on average, expect SanDisk to report revenue of $1.57 billion on earnings of $1.26 per share.

Last quarter, SanDisk beat Wall Street estimates by 12 cents, which marked the fourth quarter in a row that this company topped estimates. Deutsche Bank put out a note today that said they expect SanDisk to deliver fourth-quarter results that are in-line with guidance. Deutsche Bank said demand overall will be solid but with many cross currents in the quarter, it doesn’t expect much revenue upside.

The current short interest as a percentage of the float for SanDisk is notable at 3%. That means that out of the 236.42 million shares in the tradable float, 7.17 million shares are sold short by the bears. This isn’t a huge short interest, but if SanDisk can surprise the street and reported solid results and guidance, it’s more than enough to spark a solid short squeeze.

From a technical standpoint, SNDK 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 $45.50 and $53.50. With the stock currently trading at around $51.40, a breakout to the upside should be in focus as we approach the quarter.

If you’re bullish on SNDK, I would look to get long after they report their results if the stock breaks out above $53.50 to $53.60 a share with strong volume. Look for volume that’s tracking in close to or above its three-month average of 5.4 million shares. If those levels get taken out post-earnings with volume, then look for SNDK to pop at least 10%.

I would only get short or avoid SNDK if after earnings this stock fails to break out and then drops back below its 50-day moving average of $49.61 a share with volume. Target a drop back toward some near-term support zones at $47 or its 200-day moving average of $44.99 if the bears whack this lower post-earnings.

SanDisk, one of George Soros' holdings, shows up on a list of Hedge Funds' Best Picks for 2012.

Under Armour

Another potential earnings short-squeeze trade is Under Armour (UA), which is set to report results on Thursday before the market close. This company is engaged in the development, marketing and distribution of branded performance apparel, footwear and accessories for men, women and youth. Wall Street analysts, on average, expect Under Armour to report revenue of $403.55 million on earnings of 60 cents per share.

During the last quarter, Under Armour beat Wall Street estimates by 1 cent, reporting a profit of 84 cents vs. estimates of net income of 83 cents. That quarter marked the fourth quarter in a row that Under Armour beat Wall Street estimates. This company has seen its net income trend higher for three quarters in a row. The company has registered double-digit year-over-year percentage revenue growth for the past four quarters.

The current short interest as a percentage of the float for Under Armour is rather high at 10.9%. That means that out of the 37.65 million shares in the tradable float, 4.07 million are sold short by the bears. This stock has the potential for monster short squeeze since the float is small and the short interest is decent.

From a technical standpoint, UA is currently trading above both its 50-day and 200-day moving averages, which is bullish This stock recently found a ton of buying support at around $70 to $71 a share, and since those buyers stepped in the stock has been uptrending towards its current price of just over $77. This move now sets up UA for a big breakout if the company can deliver strong earnings results and guidance.

If you’re bullish on UA, I would wait until after it reports its results and buy the stock once it breaks out above $78.63 a share on heavy volume. Look for volume that’s tracking in close to or above its three-month average action of 1.169,420 shares. If we get that high-volume breakout post-earnings, then look for UA to trend back towards $85 to $87.40 a share, or possibly much higher.

I would avoid any long trades or get short UA if after earnings this stock fails to breakout and it drops back below its 50-day moving average of $76.51 a share on heavy volume. I would then add to any short positions once UA takes out $69 a share with volume. Target a drop back toward $62.50 if $69 gets taken out with volume post-earnings.

Teradyne

One earnings short-squeeze trade idea in the semiconductor complex is Teradyne (TER), which is set to release numbers on Wednesday after the market close. This company is a global supplier of automatic test equipment. Wall Street analysts, on average, expect Teradyne to report revenue of $284.75 million on earnings of 12 cents per share.

This company has beaten Wall Street estimates for the last four quarters in a row, and it's coming off a quarter in which it beat estimates of 11 cents, reporting a profit of 34 cents per share vs. a mean estimate of net income of 23 cents per share. Teradyne’s net income has dropped in each of the last two quarters, and revenue has also dropped in the last two quarters.

The current short interest as a percentage of the float for Teradyne stands at 11.8%. That means that out of the 183.06 million shares in the tradable float, 21.60 million are sold short by the bears. The bears have been increasing their short positions from the last reporting period by around 3%, or about 619,000 shares.

From a technical standpoint, TER is currently trading well above both its 50-day and 200-day moving averages, which is bullish. This stock recently triggered a breakout trade once it moved above $14.18 and then $15.05 a share with heavy volume. Now this stock is setting up to trigger another big breakout if it can manage to move above some near-term overhead resistance.

The way I would play TER would be to wait until after it report its earnings and buy the stock if it breaks out above $16.49 on big volume. Look for volume that’s tracking in close to or above its three-month average action of 4.25 million shares. If we get that move, I would look TER to make a run at $18.60 to $19 a share, or possibly much higher.

I would only consider shorting TER after earnings if the stock fails to break out over $16.49 and it drops below $15 a share on heavy volume. I would target a drop back towards its 50-day moving average of $13.92, or possibly down to $12.50 if that breakout fails and the selling volume is strong.

As of the most recently reported quarter, Teradyne was one of the top holdings at Bridgewater Associates and also shows up in David Tepper's Appaloosa Management portfolio.

Lam Research

Another earnings short-squeeze candidate is semiconductor player Lam Research (LRCX), which is set to release numbers on Wednesday after the close. This company is a supplier of wafer fabrication equipment and services to the worldwide semiconductor industry. Wall Street analysts, on average, expect Lam Research to report revenue of $572.79 million on earnings of 30 cents per share.

Lam Research missed Wall Street estimates last quarter, so investors will be looking for a better showing this quarter. Their profits have trended up year-over-year by an average of 49.3% over the past five quarters. During the last quarter, their year-over-year revenue decreased for the first time in the last four quarters.

The current short interest as a percentage of the float for Lam Research is worth mentioning at 6.7%. That means that out of the 119.01 million shares in the tradable float, 7.96 million shares are sold short by the bears. The bears have also been increasing their bets from the last reporting period by 85%, or by about 3.65 million shares.

From a technical standpoint, LRCX is currently trading above both its 50-day and 200-day moving averages, which is bullish. This stock has trended up strong from its December low of $34.81 to its current price of just over $43 a share. This stock now sets up for a big breakout post-earnings if the company can deliver strong results.

If you’re bullish on LRCX, I would wait until after it reports earnings and buy some shares if it breaks out above $43.67 and $45.48 a share on big volume. Look for volume that’s tracking in close to or above its three-month average action of 3,482,650 shares. If we get that high-volume breakout, then look for LRCX to trend back towards $48 to $50 a share, or possibly higher.

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I would only get short or avoid LRCX after earnings if it trades back below its 200-day moving average of $42.01 on high-volume. If we get that move, I would then add to any short positions if the stock takes out its 50-day moving average of $39.74 a share with volume. Target a drop back towards $37 or possibly lower if the bears hammer this stock down post-earnings.

Lam Research, another of David Tepper's holdings, shows up on a list of 7 Stocks JPMorgan Thinks You Should Buy.

Travelzoo

An earnings short-squeeze play in the personal services complex is Travelzoo (TZOO), which is set to release numbers on Thursday before the market open. Wall Street analysts, on average, expect Travelzoo to report revenue of $38.69 million on earnings of 35 cents per share.

If you’re looking for a stock with a monster short interest that’s also nearing some key breakout levels before reporting earnings, then take a strong look at shares of Travelzoo. The current short interest as a percentage of the float for Travelzoo is extremely large at 92.6%. That means that out of the 5.04 million shares in the tradable float, 5 million are sold short by the bears.

From a technical standpoint, TZOO is currently trading above both its 50-day moving average and well below its 200-day moving average, which is neutral trendwise. This stock recently found some buying support right at its 50-day moving average of $27.40, and since then it has bounced nicely toward its current price of just above $30 a share. This bounce has now pushed TZOO right near a big breakout level.

If you’re bullish on TZOO, I would wait until after it reports and buy the stock if it takes out $31.66 a share with strong volume. Look for a breakout on volume that’s tracking in close to or well above its three-month average action of 597,448 shares. If we get that action, I would then add to any long positions if TZOO takes out some more overhead resistance at $35 a share with volume. Target a run back towards $40 a share or possibly much higher if a large short-squeeze develops post-earnings.

I would only look to short TZOO or avoid this stock after earnings if it fails to break out over $31.66 a share. If you get short on a breakout failure, I would then add to any short positions once it takes out its 50-day moving average of $27.40 with volume. Target a drop back towards some near-term support at $24.50 if the bears push this stock lower post-earnings.

To see more potential earnings short squeeze plays, includingViroPharma (VPHM), KLA-Tencor (KLAC) and Rambus (RMBS), 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.