Stock Quotes in this Article: CTAS, FINL, SCS, TIBX, TXI

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 earning 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.

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 time frame 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. This way, you let 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 by waiting. 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 explode higher.

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

    Finish Line

    My first earnings short-squeeze candidate is Finish Line (FINL), which is set to report its results on Thursday after the market close. This is a mall-based specialty retailer of athletic shoes, apparel and accessories. Wall Street analysts, on average, expect Finish Line to report revenue of $321.63 billion on earnings of 38 cents per share.

    Ahead of this company’s earnings report, an analyst at Canaccord Genuity reiterated a buy rating on the stock with a $24 price target. The analyst said given the consistent strength in the lightweight running category coupled with a solid basketball release schedule from Nike (NKE), Finish Line should post a solid second quarter.

    The current short interest as a percentage of the float for Finish Line is rather large at 9.6%. That means that out of the 52.25 million shares in the tradable float, 5.02 million are sold short by the bears. The bears have also been increasing their bets from the last reporting period by 10.8%, or by about 491,000 shares. This stock has a low float and a high short interest. Any good news should easily set off a solid short squeeze.

    From a technical standpoint, this stock is currently trading above its 200-day moving average but below its 50-day moving average, which is neutral trendwise. If you take a look at the chart for FINL, you’ll see that this stock has some huge overhead resistance at around $23 to $23.50 a share. The stock has failed at those levels over 10 times from May to early August. That said, the stock has been making higher lows and higher highs for the past two months, which is bullish.

    I would look to buy this stock after they report once it breaks out above $21 a share on big volume. Look for volume that’s tracking in close to or above 859,000 shares. I would target a run back toward those major overhead resistance levels of $23 to $23.50 a share if the bulls jump into this name post-earnings. I would only add to any long position if this stock clears $23.58 on big volume.

    I would get short this stock after earnings only if shares drop below the 200-day moving average of $19.48 a share on heavy volume. I would add to any short position if the stock then takes out $18 a share and target a drop back toward $16.40 to $15 a share if the bears knock this stock down post-earnings.

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    Cintas

    Another stock with the potential to see an earnings short squeeze is Cintas (CTAS), which is set to release results on Thursday after the market close. This company provides corporate identity uniforms and related business services in North America, Latin America, Europe and Asia. Wall Street analysts, on average, expect Cintas to report revenue of $998.52 million on earnings of 48 cents per share.

    One interesting thing about this company is that the CEO Scott Farmer has bought over $17 million worth of stock ahead of the quarter back in early August. Most of those purchases were done at around $27 a share. So far those buys have looked smart with the stock currently trading at just over $31.50 a share.

    Related: 5 Stocks Flashing Insider-Buying Alerts

    The current short interest as a percentage of the float for Cintas is a notable 5.9%. That means that out of the 111.19 million shares in the tradable float, 6.54 million are sold short by the bears. The bears have also been increasing their bets from the last reporting period by 4%, or about 252,300 shares.

    From a technical standpoint, this stock is currently trading above both its 50-day and 200-day moving averages, which is bullish. This stock has also been making higher lows and higher highs since hitting a near-term bottom back in August at $26.59 a share.

    I would be a buyer of this stock after its release their results once it triggers a major breakout above $31.76 and $32.50 a share on solid volume. A move above those levels would set this stock up for a run back towards $34.50, which is where it double topped back in late July. Look for volume that’s tracking in close to or above 1.5 million shares if we get the post-earnings breakout.

    I would short this stock after its report only if it drops below both its 50-day moving average of $30.94 and its 200-day moving average of $30.19 on big volume. If we see that kind of action, I would then add to any short bets with a move below $28.30 a share and target a drop back towards $26.50 if the bears lean hard on this stock post-earnings.

    Cintas is one of 2011's Dividend Aristocrats.

    Texas Industries

    An earnings short-squeeze play in the construction and raw materials sector is Texas Industries (TXI), which is set to release numbers on Wednesday after the market close. This supplier of heavy construction materials in the southwestern U.S. operates in three segments: cement, aggregates and consumer products. Wall Street analysts, on average, expect Texas Industries to report revenue of $179.68 million on a loss of 27 cents per share.

    This company missed Wall Street estimates last quarter after it reported a loss of 57 cents a share vs. estimates of a loss of 28 cents a share. Its gross margins also shrank last quarter by 8.4%. Revenue dropped 0.3% while cost of sales jumped 9.2% to $169.3 million from a year earlier.

    The current short interest as a percentage of the float for Texas Industries is an extremely large 25.5%. That means that out of the 21.76 million shares in the tradable float, 5.56 million are sold short by the bears. This is a giant short position, so any bullish news could set off a massive short-squeeze for TXI.

    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 recently formed a near-term bottom at around $30 a share and since then has been making a series of higher lows and higher highs, which is bullish price action.

    If you want to buy this stock for an earnings short squeeze, I would wait until after it reports its results and buy the breakout if the stock trades above $39.70 to $39.88 a share on solid volume. A move above those levels will take the stock back above its 200-day moving average. I would add to any long position if the stock then trades above $41 a share and target a run back towards $43 or higher if the bulls spark a big short squeeze.

    I would short this name after its report only if it drops below its 50-day moving average of $36.17 a share on big volume. Any volume close to or over its three-month average volume of 309,000 shares should be considered strong. A move below that level should set the stock up to trade down towards its next significant support level at$32.55 a share or possibly lower if the bears beat this stock down post-earnings.

    Steelcase

    Another earnings short-squeeze play is Steelcase (SCS), which is set to release numbers on Wednesday after the market close. This company designs, manufactures and distributes furniture systems and seating products, user-centered technologies and interior architectural products, primarily in North America, Europe4, and Asia. Wall Street analysts, on average, expect Steelcase to report revenues of $686.70 million on earnings of 17 cents per share.

    Growth for the current quarter is forecasted to come in at 112.5%, and for this year, Steelcase is estimated to grow at 76.3%. Despite those bullish forecasts, this stock has been crushed ahead of the quarter, with shares dropping from its July high of $11.94 a share to its current price of around $7.30 a share.

    The current short interest as a percentage of the float for Steelcase sits at around 4%. That means that out of the 84.74 million shares in the tradable float, 3.26 million are sold short by the bears. It’s worth noting that the bears have also increased their bets from the last reporting period by 6.8%, or by about 206,800 shares.

    From a technical standpoint, the stock is currently trading above below both its 50-day and 200-day moving averages, which is bearish. That said, the stock has started to form a sideways trading pattern between $6.50 and $8.50 a share during the past two months. The next move out of this range will define what trend the stock now wants to trade in.

    I would look to be a buyer of this stock after its report if it trades above some near-term overhead resistance at $7.70 a share on big volume. Look for volume that’s tracking in close to or greater than its three-month average action of 218,000 shares. I would add aggressively to any long position if you then see SCS trade back above its 50-day moving average of $8.50 a share. I would target a move back towards its 200-day moving average of $10 a share if the bulls can set off a post-earnings short-squeeze.

    I would short this name after earnings have been released only if the stock drops below $6.50 a share on heavy volume. I would add to any bearish bets if it then drops below $6 a share and target a drop back towards $5 a share if the bears knock this lower post-earnings.

    Steelcase is one of the highest-yielding consumer durables stocks.

    Tibco Software

    An earnings short-squeeze play in the software and programming sector is Tibco Software (TIBX), which is set to release numbers on Thursday after the market close. This company’s standards-based software offerings enable customers to create configurable applications from software infrastructure and deliver real-time insights. Wall Street analysts, on average, expect Tibco Software to report revenue of $219.92 million on earnings of 21 cents per share.

    This company beat Wall Street estimates last quarter by 1 cent, and its profit has risen year-over-year by an average of 38% over the past five quarters. Tibco is estimated to report growth for the current quarter at 23.5% and for this year at 22.4%.

    The current short interest as a percentage of the float for Tibco sits at 2.9%. That means that out of the 155.14 million shares in the tradable float, 4.67 million are sold short by the bears. This isn’t a huge short interest, but it’s enough to spark a squeeze if the company can deliver strong results and bullish guidance.

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    From a technical standpoint, the stock is currently trading well below both its 50-day and 200-day moving averages, which is bearish. This stock has fallen hard since hitting its July high of $31.45 a share after printing a recent low of $18.43 a share. After hitting that low, shares of TIBX have started to make higher lows, which could be signaling a trend change.

    If you’re bullish on this stock, I would be a buyer after they report earnings if the stock can trade above its 50-day moving average of $23.66 on strong volume. Look for volume that’s tracking in close to or above its three-month average action of 4.4 million shares. I would add to any long position once the stock trades above its 200-day day moving average of $24.82 a share on solid volume. Target a run back towards $28 a share or possibly even higher if the bulls force the shorts to cover some of their bets.

    I would short this name after its report only if drops below $20 a share on strong volume. I would add to any short position if it then slides below $18.40 a share and target a run back toward $16 if the bears whack this lower post-earnings.

    To see more potential earnings short squeeze candidates, including Red Hat (RHT), FedEx (FDX) and KB Home (KBH), 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.