Stock Quotes in this Article: CONN, GIII, OPTT, PSUN, TITN

 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 to ignite a large short squeeze.

Short-sellers hate being caught short a stock that announces bullish earning and forward guidance. When this happen, we often see a tradable short-squeeze develop as the bear 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 is going to be in such high demand that you will miss a lot of the move. That’s why it’s only worth betting prior to the report if you have a very strong conviction that the stock is going to explode higher.

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

 

Conn's

My first earnings short-squeeze candidate is specialty retailer of consumer products Conn's (CONN), which is set to report its results on Thursday before the market open. Wall Street analysts, on average, expect Conn's to report revenue of $181.13 million on earnings of 16 cents per share.

If you’re looking for a strong uptrending stock going into earnings, then Conn's is one you need to consider. This stock formed a double bottom back in September at around $5 a share. After hitting that bottom, the stock has been doing nothing but uptrending and making higher highs and higher lows, which is bullish price action. Shares now change hands at around $12.20 a share.

The current short interest as a percentage of the float for Conn's is an extremely large 24%. That means that out of the 14.52 million shares in the tradable float, 3.55 million are sold short by the bears. This is a very high short interest stock with an extremely low float. Any bullish earnings and guidance news could easily set off a monster short-squeeze in Conn's.

 

 

From a technical standpoint, Conn's is currently trading above both its 50-day and 200-day moving averages, which is bullish. The stock recently broke out above $11.72 a share and now is setting up for another breakout above $12.38 a share.

If you’re bullish on Conn's, I would buy the stock after it reports earnings if it manages to break out above $12.38 on high volume. Look for volume that’s tracking in close to or above its three-month average volume of 258.545 shares. If we get that action post-earnings, I would then add to any long positions once it takes out $13 a share with volume. Target a run back towards $15 a share, or possibly even higher if the bulls gain full control of this stock.

I would only get short CONN after its report if it fails to breakout and it drops below $11.50 with volume. If we get that action, I would then add to any short positions on a drop below $9.77 to $9.34 (its 50-day) with volume. Target a drop back toward $8 to $7 a share if the bears hammer this lower post-earnings.

G-III Apparel Group

Another stock with the potential to see an earnings short-squeeze is G-III Apparel Group (GIII), which is set to release results on Wednesday after the market close. This company designs, manufactures and markets various women’s and men’s apparels in the U.S. Wall Street analysts, on average, expect G-III Apparel Group to report revenue of $497.49 million on earnings of $2.14 per share.

If you’re looking for a beaten-down stock with snapback potential heading into earnings, then G-III Apparel is a solid candidate. This stock was hammered by the sellers from its October high of $29.75 to a recent low of a $17.31. After hitting that low, some high-volume up days have started to show up in the last couple of trading sessions, which is bullish.

The current short interest as a percentage of the float for G-III Apparel Group is a rather high at 10.3%. That means that out of the 13.83 million shares in the tradable float, 1.64 million are sold short by the bears. The bears have also been increasing their bets from the last reporting period by 8.2%, or by about 123,530 shares.

From a technical standpoint, G-III Apparel Group is currently trading well below both its 50-day and 200-day moving averages, which is bearish. That said, the stock has just started to trigger a breakout trade now that shares are starting to move above some past overhead resistance at $19 a share on strong volume. If this breakout holds post-earnings, then this stock could rip higher from current levels.

If you’re bullish on GIII, then I would look to be a buyer if the stock stays above $19 a share post-earnings. If that breakout holds, then target a run back towards the 50-day moving average of $23.60, or possibly even higher if the bulls gain full control. I would simply avoid this name for an earnings short-squeeze trade if the stock moves back below $19 on high-volume.

I also featured G-III recently in "6 Stocks Rising on Unusual Volume."

Titan Machinery

One earnings short-squeeze play in the construction services complex is Titan Machinery (TITN), which is set to release numbers on Thursday before the market open. This company owns and operates a network of agricultural and construction equipment stores in the U.S. Wall Street analysts, on average, expect Titan Machinery to report revenue of $383.90 million on earnings of 50 cents per share.

Stephens came out with a note this morning on Titan Machinery that said the company’s ag fundamentals remain robust and the turnaround in the construction segment is expected to continue. The firm rates the stock an overweight with a $36 price target.

The current short interest as a percentage of the float for Titan Machinery is notable at 8.6%. That means that out of the 15.85 million shares in the tradable float, 1.44 million are sold short by the bears. This stock has an extremely low float and a decent short interest. Any solid earnings news and we could see a massive short-interest kickoff.

From a technical standpoint, Titan Machinery is currently trading above its 50-day moving average and below its 200-day moving average, which is neutral trendwise. This stock is now trading within range of a big breakout if it can manage to take out some overhead résistance levels post-earnings.

If you’re bullish on TITN, I would look to be a buyer after they report if the stock can manage to breakout above $23.50 and then $25.11 (its 200-day) on high volume. Look for volume that’s tracking in close to or above its three-month average action of 322.509 shares. If we get that move, I would then add to any long position once the stock takes out $27.69 with volume. Target a run back toward $30 a share or possibly even higher.

I would avoid TITN for a short-squeeze play if it fails to break out post-earnings and if it drops below its 50-day moving average of $21.26 on high volume. A high-volume move below its 50-day would make this stock a short sale candidate. I would target a drop back toward $18.50 if we see that action after they report.

Pacific Sunwear of California

An earnings short-squeeze play in the apparel sector is specialty retailer Pacific Sunwear (PSUN), which is set to release numbers on Wednesday after the market close. Wall Street analysts, on average, expect Pacific Sunwear to report revenue of $232.76 million on a loss of 14 cents per share.

If you’re looking for a penny stock that could potentially be putting in a bottom ahead of earnings, then take a hard look at Pacific Sunwear of California. This stock has been trading range-bound since October between $1.11 and $1.46 a share. As long as $1.11 holds after earnings, then we could be seeing this stock form a bottom.

The current short interest as a percentage of the float for Pacific Sunwear of California is extremely high at 15.2%. That means that out of the 35.86 million shares in the tradable float, 6.87 million are sold short by the bears. The bears have also been increasing their bets from the last reporting period by 5.6%, or by about 361,700 shares. If the short-sellers are getting too aggressive into this quarter, then we could see a decent short-squeeze develop.

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From a technical standpoint, Pacific Sunwear is currently trading above its 50-day moving average and substantially below its 200-day moving average, which is neutral trendwise. This stock plunged from its August high of $3.02 to a recent low of $1.11. After hitting that low, the stock has started to trade range bound and now sets up for a breakout on a move above $1.40 to $1.46 a share.

If you’re bullish on PSUN, I would wait until after they report and buy the stock once it breaks out over $1.40 to $1.46 on strong volume. Watch for volume that’s tracking in close to or above its three-month average action of 657,647 shares. If we get that action, then I would add to any long position once it takes out $1.68 with volume. Target a run back toward $2.20 to $2.49 (its 200-day) if the bulls gain full control of this stock post-earnings.

I would avoid PSUN for an earnings short-squeeze play if the stock drops below $1.26 a share on high-volume following their report. Target a drop back toward $1.11, or possibly even lower if the bears whack this down post-earnings.

Ocean Power Technologies

One more earnings short-squeeze idea play is Ocean Power Technologies (OPTT), which is set to release its numbers on Friday before the market. This company develops and is commercializing systems that generate electricity by harnessing the renewable energy of ocean waves. There are currently no Wall Street revenue estimates for Ocean Power for this quarter. The current EPS estimate is for a loss of 32 cents per share.

If you’re looking for a low-priced alternative energy stock that has some upside potential off of any strong earnings report, then Ocean Power Technologies could be just the play for you.

The current short interest as a percentage of the float Ocean Power Technologies stands at 10.2%. That means that out of the 9.79 million shares in the tradable float, 997,272 are sold short by the bears. This stock has an extremely low float and a decent amount of shorts involved. Any bullish earnings news could easily kick off a sizable short-squeeze.

From a technical standpoint, Ocean Power Technologies is currently trading right around its 50-day moving average and below its 200-day moving average, which is neutral trendwise. The stock hit a high of $5.60 in late August and subsequently fell to $2.76 in late November. Since that drop, the stock has rallied back to its current price of $3.40. This now puts the stock within range of a breakout if the company can deliver bullish earnings and guidance.

I would look to be a buyer of OPTT after earnings if it can manage to break out above $3.92 to $4.07 (its 200-day) on strong volume. Look for volume that’s tracking in close to or above its three-month average action of 150,728 shares. If we get that action, I would target a run back towards $5.60 a share or possibly even higher.

I would avoid OPTT for an earnings short-squeeze play if the stock fails to trade back above its 50-day moving average of $3.48 following earnings. A failure to get back above this key moving average would set this stock up to drop back towards $2.76 if Wall Street doesn’t like their numbers.

To see more potential earnings short squeeze candidates, including Ciena (CIEN), Smith & Wesson (SWHC) and Comtech Telecommunications (CMTL), 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.