Stock Quotes in this Article: ANGO, HELE, IDT, ISCA, RBN

WINDERMERE, Fla. (Stockpickr) -- News events have the power to create big volatility in stocks, and one event that can move them substantially higher or lower is an earnings release. Combine a bullish earnings report with a stock that’s heavily shorted, and you have the fuel that can ignite a large short squeeze.

Short-sellers hate being caught short a stock that announces bullish earnings and forward guidance. When this happens, we often see a tradable short squeeze develop as the bears rush to cover their positions and avoid huge losses. Even the most skilled short-sellers know that it’s never a great idea to stay short once an earnings even sparks a big short-covering rally.l

This is precisely why I search the market for heavily shorted stocks that are about to report earnings. You only need to find a couple of these candidates 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 from off a short squeeze. When you do this, you’re letting the trend emerge after the market has digested all of the news.

    Of course, sometimes a stock will 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.

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

     

    International Speedway

    My first earnings short-squeeze play is International Speedway (ISCA), which is set to report its results on Thursday before the market open. International Speedway owns motorsports entertainment facilities and is a promoter of motorsports-themed entertainment activities in the U.S. Wall Street analysts, on average, expect the company to report revenue of $156.47 million on earnings of 31 cents per share.

    International Speedway has been inconsistent when it comes to beating Wall Street estimates this year. Profits have trended higher year over year by an average of 12.7% over the past five quarters, but revenue has fallen for the past three quarters. The stock is acting very weak in front of the quarter; shares recently hit a new 52-week low.

    The current short interest as a percentage of the float for International Speedway stands at 7%. That means that out of the 23.69 million shares in the tradable float, 1.87 million are sold short by the bears. It’s worth pointing out that the bears have also been increasing their bets from the last reporting period by 7.7%, or by about 134,700 shares.

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    From a technical standpoint, this stock is trading well below both its 50-day and 200-day moving averages, which is bearish. This stock dropped big from its July high of $30.90 to a recent low of $21.27 a share, but it has now started to trade sideways between $25.50 and $21.39 a share. A move out of this sideways pattern will determine the next trend for the stock.

    I would look to buy this stock after its report if it can manage to trade back above its 50-day moving average of $24.05 and then above resistance at $25.50 a share on strong volume. Look for volume that’s tracking in close to or above its three-month average action of 179,300 shares. If those levels are taken out, then look for a run back toward its 200-day of $27.59.

    I would get short International Speedway after earnings only if it drops below that big support zone at $21.39 a share on heavy volume. A loss of that support zone should open up the door for some big selling. Target a drop back toward $18 to $17 a share if the bears take hold of this stock post-earnings.

    >>5 Sentiment Indicators to Keep an Eye On

    AngioDynamics

    Another stock with the potential to see an earnings short squeeze is AngioDynamics (ANGO), which is set to release results on Thursday after the market close. This company designs, develops, manufactures and markets a line of therapeutic and diagnostic devices that enable interventional physicians to treat peripheral vascular disease, tumors and other non-coronary diseases. Wall Street analysts, on average, expect AngioDynamics to report revenue of $53.86 million on earnings of 8 cents per share.

    This stock has been beaten down pretty good in front of the quarter, with shares dropping from a May high of $16.56 a share to a recent low of $12.60 a share. A solid earnings report and bullish guidance could set off a short squeeze for this stock.

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    The current short interest as a percentage of the float for AngioDynamics is worth noting at 5.3%. That means that out of the 24.79 million shares in the tradable float, 1.31 million are sold short by the bears. The short-sellers have also been increasing their bets from the last reporting period by 5.3%, or about 65,300 shares. If the bears are caught pressing their bets in front of the quarter, and we get bullish news, then they could be forced to cover some of those bets and buy the stock back.

    From a technical standpoint, this stock is currently trading below both its 50-day and 200-day moving averages, which is bearish. That said, the stock has been stuck in a sideways trading pattern since August, between $12.60 and $14.60 a share. A move outside of that pattern will set this stock up for its next trend.

    I would be a buyer of this stock after they report earnings if it holds above $12.60 and you see strength enter the name. I would then add to any long position once it takes out $14.60 to its 200-day of $15.09 with volume. Look for volume that’s tracking in close to or greater than its three-month average volume of 145,300 shares. Target a rise towards $16 a share or possibly higher if the bulls can really get a solid short squeeze going.

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    I would only short this stock after they report if it drops below that key support area at $12.60 a share on heavy volume. Target a drop back towards $11 to $10 a share if the bears gain full control of this name post-earnings.

    Helen of Troy

    Helen of Troy (HELE), which is set to release numbers on Thursday before the market open, is a global designer, developer, importer and distributor of an expanding portfolio of brand-name consumer products. Wall Street analysts, on average, expect Helen of Troy to report revenue of $288.80 million on earnings of 87 cents per share.

    This company missed estimates last quarter after topping estimates in the prior two quarters. Helen of Troy’s profits have trended higher year over year by an average of 34.3% over the past five quarters. Revenue has trended higher for three straight quarters. Just today, Wedbush upgraded the stock to neutral from underperform based off the recent share price drop and stabilization of input costs. Wedbush has a $26 price target on the stock.

    The current short interest as a percentage of the float for Helen of Troy sits at 4.5%. That means that out of the 28.49 million shares in the tradable float, 1.28 million are sold short by the bears. The short-sellers have also been increasing their bets from the last reporting period by 6.1%, or about 73,900 shares.

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    From a technical standpoint, this stock is trading well below both its 50-day and 200-day moving averages, which is bearish. This stock has been beaten down big since hitting its July high of $36.75, with shares currently changing hands at around $26. The stock just bounced off some previous support at $23.80, which is very close to an area shares found buying interest back in November and December of 2010.

    If you want to jump in this stock for an earnings short-squeeze play, I would wait until after its report and buy once it trades above $26.50 a share on solid volume. Look for volume that’s tracking in close to or above its three-month average action of 206,300 shares. I would then add to any long position once the stock takes out its 200-day moving average of $29.90 a share with volume. Target a run back towards $32 or possibly even higher if the bulls gain control of this stock post-earnings.

    Helen of Troy, one of TheStreet Ratings' Top-Rated Household Durable Goods Stocks, was also featured in "5 Stocks to Trade Ahead of Earnings."

    IDT

    One earnings short-squeeze trade in the communications services sector is IDT (IDT), which is set to release numbers on Thursday after the market close. This is a multinational holding company with operations primarily in the telecommunications and energy industries. Its products include mattresses and mattress foundations. Wall Street analysts, on average, expect IDT to report revenue of $398.97 million on earnings of 24 cents per share.

    This is another name that’s been beaten down big in front of the quarter, since shares have dropped from July highs of $28 a share to its current price of around $19 a share. This large drop in the stock could be setting up shares for a sharp rebound if the bulls get the news they’re looking for.

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    The current short interest as a percentage of the float for IDT is 4.5%. That means that out of 15.5 million shares in the tradable float, 664,059 are sold short by the bears. The bears have also been increasing their bets from the last reporting period by 10.4%, or about 62,500 shares.

    From a technical standpoint, the stock is currently trading well below both its 50-day and 200-day moving averages, which is bearish. That said, the stock has moved into a sideways trading pattern since August with shares trading between $22 and $18.30 a share. Once the stock breaks out or below this pattern, then we will know the next trend that shares are likely to embark on.

    If you’re bullish on this stock, I would be a buyer after it reports earnings if the stock holds above that major support zone around $18.38 a share. If that price level holds, I would be a buyer once you see strength in the stock post-earnings. I would add to any long position once this stock takes out $22 a share with heavy volume. Look for volume that’s tracking in close to or above its three-month average action of 165,500 shares.

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    I would only get short this name after earnings if the stock drops below $18.38 on heavy volume. A move below that level should set this stock up for a move back towards $15 to $14 a share or possibly even lower if the bears hammer this lower post-earnings.

    Robbins & Myers

    One final earnings short-squeeze trade is Robbins & Myers (RBN), which is set to release numbers on Thursday before the market open. This is a supplier of engineered equipment and systems for critical applications in global energy, industrial, chemical and pharmaceutical markets. Wall Street analysts, on average, expect Robbins & Myers to report revenue of $254.90 billion on earnings of 75 cents per share.

    During the last quarter, the company reported earnings of 53 cents per share, which matched Wall Street estimates of 53 cents. Quarterly revenue for last quarter jumped 98.1% on a year-over-year basis. If Robbins & Myers can top 75 cents for this quarter and guide higher, then we could see this stock experience a sharp rally.

    The current short interest as a percentage of the float for Robbins & Myers is worth mention at 5.3%. That means that out of the 40.01 million shares in the tradable float, 2.12 million are sold short by the bears. This isn’t a huge short interest, but it’s more than enough to kickoff a short-covering rally if the bulls hear what they’re looking for.

    From a technical standpoint, the stock is currently trading substantially below both its 50-day and 200-day moving averages, which is bearish. This stock has plunged from its July high of $55.63 to its current price of just over $32 a share. That sharp drop has created an oversold condition since the relative strength index reading for this stock is 31. Oversold can always get more oversold, but a reading of 30 or lower is often an area where stocks bounce higher from.

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    I would look to be a buyer of this stock after it releases its results if the stock can break out above $34.33 a share on big volume. Look for volume that’s tracking in close to or greater than its three-month average action of 504,000 shares. That $34.33 area was a previous support zone that the stock dropped below just recently. If we can get back above that level, then look for this stock make a run at $39.50 or possibly higher if the bulls gain control of the stock post-earnings.

    To see more potential earnings short squeeze candidates, 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.