Stock Quotes in this Article: LNN, SWY, UEC, WGO, ZEP

WINDERMERE, Fla. (Stockpickr) -- News events have the power to create big volatility, and one event that can move stocks 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 to 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 event sparks a big short-covering rally.

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    This is why I scan 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.

    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 manage your risk accordingly. Sometimes the best play is to wait for the stock to breakout 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 the stock will be in such high demand that you risk missing a lot of the move. That’s why it’s worth betting prior to the report -- but only if you have a very strong conviction that the stock is going to explode higher.

    Yesterday I highlighted five potential short-squeeze plays in "5 Stocks Set to Soar off Bullish Earnings." "Here’s a look at several more stocks that could experience big short squeezes when they report earnings this week.

    Zep

    My first earnings short-squeeze idea is Zep (ZEP), which is set to report its results on Thursday before the market open. Zep produces, markets, and services a range of cleaning and maintenance solutions for commercial, industrial, institutional, and consumer end-markets. Wall Street analysts, on average, expect the company to report revenue of $175.56 million on earnings of 37 cents per share.

    This company is on tap to meet Wall Street estimates for the third consecutive quarter. Zep’s profits have jumped year over year by an average of 33.8% over the past five quarters. Revenue has been trending up for the last three straight quarters.

    The current short interest as a percentage of the float for Zep sits at 4.2%. That means that out of the 21.44 million shares in the tradable float, 1.01 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 9.7%, or about 89,700 shares. This isn’t a huge short interest, but it’s big enough to spark a solid short-covering rally if Zep can report a decent quarter and guide higher.

    From a technical standpoint, this stock is currently trading above both its 50-day and 200-day moving averages, which is bullish. Zep recently found some big buying support at around $13.33 to $13.88 a share and since then has run up to its current price of $17.74 a share. Now the stock is setting up perfectly for a breakout trade if the right levels are tagged following earnings.

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    I would look to buy this stock after it reports earnings if it can manage to break out above $18 a share on big volume. If we get that breakout, I would then add aggressively if the stock takes out some more overhead resistance at $19.30 a share with volume. Look for volume that’s tracking in close to or above its three-month average action of 69,800 shares. Target a run back towards its 52-week high of $20.95 or possibly even higher if bulls gain control of this stock post-earnings.

    I would only get short this stock after earnings if it drops below its 50-day moving average of $16.20 a share on big volume. Target a drop back towards $14 a share or possibly even lower if the bears take this stock over post-earnings.

    Winnebago Industries

    Another stock with the potential to see an earnings short-squeeze is Winnebago Industries (WGO), which is set to release results on Thursday before the market open. Winnebago is manufacturer of self-contained recreation vehicles used mainly in leisure travel and outdoor recreation activities. Wall Street analysts, on average, expect the company to report revenue of $116.84 million on earnings of 4 cents per share.

    Winnebago failed to beat Wall Street estimates last quarter, and since then, the stock has taken a beating heading into this quarter. Shares of Winnebago were trading near $13 in May, but that’s a long ways away from its current price of just over $7.20 a share. Some of the reason this stock has fallen so much is due to its declining income, which has dropped year over year by an average of 50.5% over the past five quarters. That said, if management was able to get things turned around for this quarter, then we could see a sharp pop off of depressed levels.

    The current short interest as a percentage of the float for Winnebago is an extremely large 16.9%. That means that out of the 26.91 million shares in the tradable float, 4.89 million are sold short by the bears. This is a low float high short interest situation, so this is a name worth watching for a big earnings short squeeze this week.

    From a technical standpoint, this stock is currently trading substantially below its 200-day moving average but right at its 50-day moving average, which is neutral trendwise. During the past two months, the stock has started to base and trade sideways between $8 on the upper end and $6 on the lower end. A near-term breakout of that sideways pattern should set this stock up for its next big trend.

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    I would be a buyer of this stock after it reports earnings if we see a breakout above $8.09 to $8.17 a share on solid volume. I would then add to any long position once it takes out $9.50 a share with volume. Look for volume that’s tracking in close to or above its three-month average volume of 325,400 shares. Target a run back towards its 200-day moving average of $11.23 a share if the bulls gain full control of this stock post-earnings.

    I would short this stock after its report only if it drops below some key support at $6.15 to $6 a share on heavy volume. Target a drop back toward $5 or possibly even $4.25 a share if the bears decide to open up the selling floodgates post-earnings.

    Winnebago is one of TheStreet Ratings' top-rated automobile stocks.

    Lindsay

    One earnings short-squeeze trade in the construction and agricultural machinery complex is Lindsay (LNN), which is set to release numbers on Thursday before the market open. Lindsay is a designer and manufacturer of self-propelled center pivot and lateral move irrigation systems used in the agricultural industry to increase or stabilize crop production while conserving water, energy and labor. Wall Street analysts, on average, expect the company to report revenue of $180.51 million on earnings of 61 cents per share.

    Lindsay beat Wall Street estimates last quarter by a whopping 24 cents per share. Its profits have jumped year over year by an average of 96.1% over the past five quarters. Revenue has also been trending up for the past three straight quarters. Another huge beat and a guidance raise for this quarter should easily spark a massive short squeeze for shares of Lindsay.

    The current short interest as a percentage of the float for Lindsay is a rather large 17%. That means that out of the 12.29 million shares in the tradable float, 2.09 million are sold short by the bears. This is a perfect storm for a potentially large short squeeze, since the short interest is so high and the tradable float is extremely low. That said, make sure the stock is showing strength after earnings before you jump in and look to profit off some notable short-covering.

    From a technical standpoint, this stock is currently trading above its 50-day moving average and below its 200-day moving average, which is neutral trendwise. This stock has been beaten-down huge since hitting its July high if $72.92 a share, with the stock printing a recent low of $46.03. That said, the stock has rebounded big from that low to its current price of just over $58 a share.

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    If you want to play Lindsay for an earnings short-squeeze play, I would wait until after its report and buy once it trades above some past overhead resistance at around $59.50 a share with solid volume. Look for volume that’s tracking in close to or above its three-month average action of 200,300 shares. I would then add to any long position once the stock takes out $62 a share, and target a run back toward the 200-day moving average of $65.04 or possibly higher if the bulls gain control of this stock post-earnings.

    I would short this name after it has reported its results only if the stock drops below $55 a share on heavy volume. I would then add to any short position if the stock takes out $52.50 a share, and target a drop back toward the 52-week low of $46.03 if the bears whack this lower post-earnings.

    Uranium Energy

    One earnings short-squeeze trade in the metal mining sector is Uranium Energy (UEC), which is set to release numbers on Thursday before the market open. Uranium Energy is a natural resource exploration company engaged in the exploration of properties that may contain uranium minerals in U.S. There are currently no Wall Street estimates available for Uranium Energy for this quarter.

    The uranium stocks as a group have been beaten down since the first quarter when the Japanese nuclear disaster hit. Despite that tragedy, there are still lots of uranium projects and nuclear power plants being built around the globe, since it’s still considered to be one of the safest forms of energy. Since we have so much pessimism surrounding the group going into the quarter, we could see a decent pop in this stock if get any bullish news.

    The current short interest as a percentage of the float for Uranium Energy is a rather large 13.4%. That means that out of the 67.02 million shares in the tradable float, 9.10 million are sold short by the bears. This is a pretty big short position on a stock that’s currently trading below $5 a share and has a very low float.

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    From a technical standpoint, the stock is currently trading below both its 50-day and 200-day moving averages, which is bearish. This stock recently broke below some big support at $2.50 a share and then hit a low of $2.20, before rebounding and now trading at around $2.85 a share. The stock is now quickly approaching its 50-day moving average of $3.06 a share ahead of the quarter.

    If you’re bullish on this stock, I would be a buyer after they report earnings once it trades back above that 50-day of $3.06 on big volume. Watch for volume that’s tracking in close to or above its three-month average action of 651,600 shares. A high-volume move above that level post-earnings should set this stock up for a re-test of some prior overhead resistance at around $3.50 to 4 a share. I would simply avoid this stock all together if it fails to move above that 50-day post earnings.

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    Safeway

    One more earnings short-squeeze idea is Safeway (SWY), which is set to release numbers on Thursday before the market open. Together with its subsidiaries, Safeway operates as a food and drug retailer in the U.S. and Canada. Wall Street analysts, on average, expect the company to report revenue of $9.84 billion on earnings of 35 cents per share.

    Safeway has topped Wall Street estimates for the past four quarters in a row, and it's coming off of a quarter in which it beat estimates by 2 cents, after it reported net income of 41 cents per share versus estimates of 39 cents per share. Revenue has also been trending up for the past three straight quarters.

    The current short interest as a percentage of the float for Safeway sits at 8.5%. That means that out of the 348.04 million shares in the tradable float, 29.48 million are sold short by the bears. This is a high enough short interest to spark a solid short-covering rally on a bullish earnings event.

    From a technical standpoint, the stock is currently trading right at its 50-day moving average and below its 200-day moving averages, which is neutral trendwise. This stock has been hammered during the past couple of months, dropping from its July highs of $24.08 to a recent low of $15.93 a share. The stock has now formed a basing trading pattern, as shares move between $18.83 on the upper end and around $16 on the lower end. A break out of this pattern should define the next trend for this stock in the near-term.

    I would look to be a buyer of this stock after earnings if it can manage to trade back above the 50-day of $17.48 and then above that big overhead resistance at $18.83 a share with big volume. A big volume move above those levels should set this stock up to re-test its 200-day moving average of $21.17, or possibly go even higher. Watch for volume that’s tracking in close to or above its three-month average action of 6.69 million shares.

    I would get short this stock only if shares drop below $15.93 with big volume after its report. A move below that level with strong volume should result in a big flush on this stock since that’s the last level of support for the past three-years, and it would push this name to a new 52-week low. Target a 10% or more drop if we lose that level with volume post-earnings.

    Safeway, one of TheStreet Ratings' top-rated food and staples stocks, is also one of the highest-yielding retail stocks.

    To see more potential earnings short squeeze candidates, includingNovaGold Resources (NG), Valmont Industries (VMI) and J.B. Hunt Transport Services (JBHT), 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.