Stock Quotes in this Article: BGFV, DDD, HLF, UNXL, SLCA

MADISON, Wis. (Stockpickr) -- Short-sellers hate being caught short a stock that reports a blowout quarter. When this happens, we often see a 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 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 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 by waiting. That’s why it can be worth betting prior to the report -- but only if the stock is acting technically very bullish and you have a very strong conviction that it is going to rip higher. Just remember that even when you have that conviction and have done your due diligence, the stock can still get hammered if The Street doesn’t like the numbers or guidance.

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If you do decide to bet ahead of a quarter, then you might want to use options to limit your capital exposure. Heavily shorted stocks are usually the names that make the biggest post-earnings moves and have the most volatility. I personally prefer to wait until all the earnings-related news is out for a heavily shorted stock and then jump in and trade the prevailing trend.

With that in mind, here’s a look at several stocks that could experience big short squeezes when they report earnings this week.

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Herbalife

My first earnings short-squeeze trade idea is nutrient-supply player Herbalife (HLF), which is set to release numbers on Monday after the market close. Wall Street analysts, on average, expect Herbalife to report revenue of $1.11 billion on earnings of $1.07 per share.
This company has beaten Wall Street estimates in each of the past four quarters. Herbalife has seen double-digit year-over-year revenue growth for the past four quarter. Over that timeframe, the company has averaged growth of 18%.

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The current short interest as a percentage of the float for Herbalife is extremely high at 32.3%. That means that out of the 75.90 million shares in the tradable float, 32.74 million shares are sold short by the bears. The bears have also been increasing their bets from the last reporting period by 3.8%, or by about 1.20 million shares. If the short-sellers are caught pressing their bets too aggressively into a strong quarter, then shares of HLF could skyrocket higher post-earnings.

From a technical perspective, HLF is currently trending above its 50-day moving average and below its 200-day moving average, which is neutral trendwise. This stock has just started to trend back above its 50-day at $38.08 a share. That move is beginning to push HLF within range of triggering a near-term breakout trade post-earnings.

If you’re bullish on HLF, then I would wait until after its report and look for long-biased trades if this stock manages to break out above some more near-term overhead resistance levels at $40.06 to $42.36 a share with high volume. Look for volume on that move that hits near or above its three-month average action of 4.97 million shares. If that breakout triggers, then HLF will set up to re-test or possibly take out its next major overhead resistance levels at its 200-day of $44.18 to $47.16 to $47.45 a share. This stock could even trend well above $50 if all of those levels get taken out with volume.

I would simply avoid HLF or look for short-biased trades if after earnings it fails to trigger that breakout, and then drops back below its 50-day at $38.08 a share with high volume. If we get that move, then HLF will set up to re-test or possibly take out its next major support levels at $35 to $34.72 a share. If those levels get taken out with volume, then HLF could trend back towards $31 a share post-earnings.

3D Systems

Another potential earnings short-squeeze play is 3D printing player 3D Systems (DDD), which is set to release its numbers on Tuesday before the market open. Wall Street analysts, on average, expect 3D Systems to report revenue of $101.61 million on earnings of 21 cents per share.

Troy Jensen at Piper Jaffray recently said the underperformance of 3D shares of late is unwarranted, adding, “We continue to view the 3D space as one of best pockets of growth in the broader equity markets and believe the industry is capable of achieving 20-25% revenue growth and 25-30% earnings growth over the next several years.”

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The current short interest as a percentage of the float for 3D Systems is extremely high at 32.2%. That means that out of the 84.94 million shares in the tradable float, 27.32 million shares are sold short by the bears. The bears have also been increasing their bets from the last reporting period by 2.9%, or by about 766,000 shares. If the bears are caught pressing their bets into a solid quarter, then shares of DDD could short-squeeze big post-earnings.

From a technical perspective, DDD is currently trending above both its 50-day and 200-day moving averages, which is bullish. This stock has been uptrending strong for the last month and change, with shares moving higher from its low of $27.88 to its recent high of $36.54 a share. During that uptrend, shares of DD have been consistently making higher lows and higher highs, which is bullish technical price action. That move has now pushed shares of DDD within range of triggering a major breakout trade post-earnings.

If you’re in the bull camp on DDD, then I would wait until after its report and look for long-biased trades if this stock manages to break out above some near-term overhead resistance levels at $36.54 to $37.85 a share with high volume. Look for volume on that move that registers near or above its three-month average volume of 4.77 million shares. If that breakout hits, then DDD will set up to re-test or possibly take out its next major overhead resistance levels at $44 to $45.50 a share.

I would simply avoid DDD or look for short-biased trades if after earnings it fails to trigger that breakout, and then drops back below its 50-day at $33.55 a share with high volume. If we get that move, then DD will set up to re-test or possibly take out its 200-day at $30.95 a share or its next major support levels at $30 to $28 a share.

U.S. Silica

Another potential earnings short-squeeze candidate is silica sand supplier U.S. Silica (SLCA), which is set to release numbers on Tuesday before the market open. Wall Street analysts, on average, expect U.S. Silica to report revenue of $121.69 million on earnings of 36 cents per share.

This company has posted a 205% growth rate over the last three years, due to strong demand from oil drillers for its specialized sand, which is used in the hydraulic fracturing process to extract oil and natural gas from shale oil deposits.

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The current short interest as a percentage of the float for U.S. Silica is extremely high at 27.3%. That means that out of the 21.38 million shares in the tradable float, 5.24 million shares are sold short by the bears. The bears have also been increasing their bets from the last reporting period by 29.2%, or by about 1.18 million shares. If the short-sellers are caught being too aggressive into a bullish quarter, then shares of SLCA could soar significantly higher post-earnings.

From a technical perspective, SLCA is currently trending above its 200-day moving average and just below its 50-day moving average, which is neutral trendwise. This stock recently hit major resistance at around $24.40 a share and then subsequently traded back below its 50-day at $22.29 a share. Shares of SLCA have now started to find some buying interest at around $19 a share, and the stock is starting to move within range of triggering a near-term breakout trade.

If you’re bullish on SLCA, then I would wait until after its report and look for long-biased trades if this stock manages to break out above some near-term overhead resistance levels at $21.78 to its 50-day at $22.29 a share with strong volume. Look for volume on that move that hits near or above its three-month average action of 1.19 million shares. If we get that breakout, then SLCA will set up to re-test or possibly take out its next major overhead resistance level at $24.39 a share. Any high-volume move above $24.39 will then put $28.50 a share into range for shares of SLCA.

I would avoid SLCA or look for short-biased trades if after earnings it fails to trigger that breakout and then drops back below some key near-term support levels at $19.68 to $19.01 a share with high volume. If we get that move, then SLCA will set up to re-test or possibly take out its next major support levels at $17.05 a share to its 200-day at $16.32 a share.

Big 5 Sporting Goods

Another earnings short-squeeze prospect is sporting goods retailer in the western U.S. Big 5 Sporting Goods (BGFV), which is set to release numbers on Tuesday after the market close. Wall Street analysts, on average, expect Big 5 Sporting Goods to report revenue of $239.02 million on earnings of 20 cents per share.

The current short interest as a percentage of the float for Big 5 Sporting Goods is notable at 6.6%. That means that out of the 15.73 million shares in the tradable float, 913,000 shares are sold short by the bears. This isn’t a huge short interest, but it’s more than enough to spark a decent short-covering rally if Big 5 Sporting Goods reports a strong quarter.

From a technical perspective, BGFV is currently trending above both its 50-day and 200-day moving averages, which is bullish. This stock has been trending sideways and consolidating for the last two months, with shares moving between $13.84 on the downside and $16.83 on the upside. This stock has just started to trend back above its 50-day at $15.07 a share and it’s now quickly moving within range of triggering a major breakout trade above the upper-end of its recent range.

If you’re bullish on BGFV, then I would wait until after its report and look for long-biased trades if this stock manages to break out above some near-term overhead resistance levels at $15.88 to $16 a share and then once it clears its 52-week high at $16.94 a share with high volume. Look for volume on that move that hits near or above its three-month average action of 224,922 shares. If that breakout triggers, then BGFV will set up to enter new 52-week-high territory above $16.94, which is bullish technical price action. Some possible upside targets off that breakout are $20 to $23 a share.

I would avoid BGFV or look for short-biased trades if after earnings it fails to trigger that breakout, and then drops back below its 50-day of $15.07 a share with high volume. If we get that move, then BGFV will set up to re-test or possibly take out its next major support levels at $14 to $13.84 a share. Any high-volume move below those levels will then put $13 to $12 into range for shares of BGFV.

UniPixel

My final earnings short-squeeze play today is performance engineered films player UniPixel (UNXL), which is set to release numbers on Tuesday after the market close. Wall Street analysts, on average, expect UniPixel to report revenue of $5 million on earnings of 12 cents per share.

Just this morning, Cowen initiated shares of UniPixel with an outperform rating. This stock has been on fire so far in 2013, with shares up a staggering 182%.

The current short interest as a percentage of the float for UniPixel is extremely high at 49.1%. That means that out of the 7.63 million shares in the tradable float, 4.39 million shares are sold short by the bears. This is a high short interest and low float situation. If the bulls get the earnings news they’re looking for, then shares of UNXL could explode higher post-earnings.

From a technical perspective, UNXL is currently trending above both its 50-day and 200-day moving averages, which is bullish. This stock has been uptrending strong for the last four months, with shares soaring higher from its low of $10.24 to its recent high of $41.42 a share. During that uptrend, shares of UNXL have been consistently making higher lows and higher highs, which is bullish technical price action. That move has now pushed shares of UNXL within range of triggering a near-term breakout trade post-earnings.

If you’re in the bull camp on UNXL, then I would wait until after its report and look for long-biased trades if this stock manages to break out above its 52-week high at $41.42 a share with high volume. Look for volume on that move that hits near or above its three-month average volume of 949,421 shares. If that breakout triggers, then UNXL will set up to enter new 52-week-high territory, which is bullish technical price action. Some possible upside targets off that breakout are $45 to $55 a share.

I would simply avoid UNXL or look for short-biased trades if after earnings it fails to trigger that breakout, and then drops back below some key near-term support levels at $35 to $33.63 a share with high volume. If we get that move, then UNXL will set up to re-test or possibly take out its next major support levels at $31.98 to $30 a share.

To see more potential earnings short squeeze plays, check out the Earnings Short Squeeze Plays portfolio on Stockpickr.

-- Written by Roberto Pedone in Madison, Wis.

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At the time of publication, author had no positions in stocks mentioned.

Roberto Pedone, based out of Madison, Wis., is an independent trader who focuses on technical analysis for small- and large-cap stocks, options, futures, commodities and currencies. Roberto studied international business at the Milwaukee School of Engineering, and he spent a year overseas studying business in Lubeck, Germany. His work has appeared on financial outlets including CNBC.com and Forbes.com. You can follow Pedone on Twitter at www.twitter.com/zerosum24 or @zerosum24.