Stock Quotes in this Article: UA, VPRT, ZOLT, FB, NGVC

WINDERMERE, Fla. (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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Facebook

My first earnings short-squeeze play is social networking player Facebook (FB), which is set to release numbers on Wednesday after the market close. Wall Street analysts, on average, expect Facebook to report revenue of $1.53 billion on earnings of 15 cents per share.

Stern Agee analyst Arvind Bhatia issued a note on Monday predicting that Facebook “will likely post strong fourth-quarter results, including 75% mobile revenue growth sequentially.” Bhatia said Facebook is well-positioned to benefit from two ad trends: the shift from off-line to on-line advertising, and the increasing importance of a social context for online ads.

The current short interest as a percentage of the float for Facebook stands at 5.4%. That means that out of the 1.32 billion shares in the tradable float, 25.47 million shares are sold short by the bears. If Facebook gives investors the earnings news they’re looking for, then this stock could rally hard as the shorts rush to cover some of their bearish bets.

From a technical perspective, FB is currently trending above both its 50-day and 200-day moving averages, which is bullish. This stock has been uptrending strong during the last five months, with shares soaring from its low of $17.55 a share to its recent high of $32.51 a share. During that uptrend, shares of FB have been mostly making higher lows and higher highs, which is bullish technical price action. That move has now pushed FB within range of triggering a near-term breakout trade post-earnings.

If you’re bullish on FB, 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 of $32.51 to $33.45 a share with high volume. Look for volume on that move that registers near or above its three-month average action of 69.1 million shares. If that breakout triggers, then FB will set up to re-test or possibly take out its all-time high of $45 a share.

I would simply avoid FB 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 at $29.27 a share with heavy volume. If we get that move, then FB will set up to re-test or possibly take out its 50-day moving average of $27.84 a share.

Under Armour

Another potential earnings short-squeeze trade is branded performance apparel maker Under Armour (UA), which is set to release its numbers on Thursday before the market open. Wall Street analysts, on average, expect Under Armour to report revenue of $497.88 million on earnings of 46 cents per share.

Just recently, Credit Suisse reiterated its outperform rating on Under Armour, citing that concerns of a slowdown in top-line momentum are overdone and that a favorable sourcing environment and improved supply chain will increase operating leverage for the long term. The firm has a $59 price target on the stock.

The current short interest as a percentage of the float for Under Armour is very high at 16.3%. That means that out of the 78.99 million shares in the tradable float, 12.75 million shares are sold short by the bears. The bears have also been increasing their bets from the last reporting period by 5.1%, or by about 613,000 shares. If the bears are caught pressing their bets into a solid quarter, then we could easily see a monster short-squeeze develop post-earnings.

From a technical perspective, UA is currently trending below both its 50-day and 200-day moving averages, which is bearish. This stock has been downtrending badly for the last three months and change, with shares dropping from its high of $60.20 a share to its recent low of $44.32 a share. During that downtrend, shares of UA have been mostly making lower highs and lower lows, which is bearish technical price action. That said, shares of UA have started to rebound off that $44.32 low and quickly move within range of triggering a near-term breakout trade.

If you’re in the bull camp on UA, 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 $48.49 to $48.82 a share and then once it clears more overhead resistance at $49.51 to $51.30 a share with high volume. Look for volume on that move that hits near or above its three-month average volume of 1.8 million shares. If that breakout triggers, then UA will set up to re-test or possibly take out its next major overhead resistance level at $55.20 a share. Any high-volume move above $55.20 will then put $58 into range for shares of UA.

I would simply avoid UA 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 at $47 a share with high volume. If we get that move, then UA will set up to re-test or possibly take out its next major support levels at $44.32 to $44.07 a share.

Zoltek

One potential earnings short-squeeze candidate is manufacturer of carbon fibers and technical fibers Zoltek (ZOLT), which is set to release numbers on Thursday after the market close. Wall Street analysts, on average, expect Zoltek to report revenue of $42 million on earnings of 13 cents per share.

If you’re looking for a heavily shorted stock that’s uptrending heading into its earnings report, then make sure to check out shares of Zoltek Companies. This stock has been trending up during the last three months, with shares higher by 13.6%.

The current short interest as a percentage of the float for Zoltek Companies is extremely high at 21.5%. That means that out of the 27.48 million shares in the tradable float, 5.91 million shares are sold short by the bears. Any bullish earnings news could easily spark a solid short-covering rally for shares of Zoltek post-earnings.

From a technical perspective, ZOLT is currently trending above its 50-day moving average and just below its 200-day moving average, which is neutral trendwise. This stock has been uptrending strong for the last three months, with shares soaring from its low of $6.03 a share to its recent high of $8.60 a share. During that uptrend, shares of ZOLT have been consistently making higher lows and higher highs, which is bullish technical price action. That move has pushed ZOLT within range of triggering a major breakout trade post-earnings.

If you’re bullish on ZOLT, then I would wait until after its report and look for long-biased trades if this stock manages to break out above some key overhead resistance levels at $8.60 to $9.17 a share and then once it clears more overhead resistance at $9.61 to $9.66 a share with high volume. Look for volume on that move that registers near or above its three-month average volume of 256,825 shares. If that breakout hits, then ZOLT will set up to re-test or possibly take out its next major overhead resistance levels at $11.41 to $12.10 a share.

I would avoid ZOLT 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 $7.73 to $7.29 a share with high volume. If we get that move, then ZOLT will set up to re-test or possibly take out its next major support levels at $7 to $6.66 a share. Any high-volume move below $6.66 will then put $6.03 into range for shares of ZOLT.

Vistaprint

Another earnings short-squeeze play is online customized marketing products and services player Vistaprint (VPRT), which is set to release numbers on Thursday after the market close. Wall Street analysts, on average, expect Vistaprint to report revenue of $341.53 million on earnings of 75 cents per share.

During the last quarter, this company beat Wall Street estimates by 3 cents, after it reported a net income of one cent per share versus Wall Street estimates of a net loss of 2 cents per share. That marked the fourth straight quarter in a row where Vistaprint topped Wall Street estimates. This company has averaged year-over-year revenue growth of 23.2% over the last four quarters.

The current short interest as a percentage of the float for Vistaprint is extremely high at 28.1%. That means that out of the 23.71 million shares in the tradable float, 8.56 million shares are sold short by the bears. This is a low float high short interest situation, so any bullish earnings news could easily spark a monster short-squeeze for VPRT post-earnings.

From a technical perspective, VPRT 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 three months, with shares soaring from its low of $28.17 a share to its recent high of $37.86 a share. During that uptrend, shares of VPRT have been mostly making higher lows and higher highs, which is bullish technical price action. That move has now pushed shares of VPRT within range of triggering a near-term breakout trade post-earnings.

If you’re bullish on VPRT, 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 $37.86 to $38.60 a share with high volume. Look for volume on that move that hits near or above its three-month average action of 293,383 shares. If that breakout triggers, then VPRT will set up to re-test or possibly take out its next major overhead resistance levels at $43 to $43.42 a share.

I would avoid VPRT or look for short-biased trades if after earnings it fails to trigger that breakout, and then drops back below its 200-day moving average of $34.55 a share and then below some key near-term support at $34 a share with high volume. If we get that move, then VPRT will set up to re-test or possibly take out its 50-day moving average of $33.03 a share. Any high-volume move below its 50-day will then put $31.08 into focus for shares of VPRT.

Natural Grocers by Vitamin Cottage

My final earnings short-squeeze play is specialty retailer of natural and organic groceries and dietary supplements Natural Grocers by Vitamin Cottage (NGVC), which is set to release numbers on Thursday after the market close. Wall Street analysts, on average, expect Natural Grocers by Vitamin Cottage to report revenue of $92.43 million on earnings of 8 cents per share.

The current short interest as a percentage of the float for Natural Grocers by Vitamin Cottage stands is pretty high at 14.7%. That means that out of the 4.67 million shares in the tradable float, 1.36 million shares are sold short by the bears. The bears have also been increasing their bets from the last reporting period by 9.7%, or by about 119,000 shares. If the short-sellers are caught leaning too hard into a bullish quarter, then shares of NGVC could explode higher post-earnings.

From a technical perspective, NGVC is currently trending above its 50-day moving average, which is bullish. This stock has been uptrending strong for the last month, with shares soaring from its low of $17.47 to its recent high of $20.88 a share. During that uptrend, shares of NGVC have been consistently making higher lows and higher highs, which is bullish technical price action. That move has now pushed shares of NGVC within range of triggering a major breakout trade post-earnings.

If you’re in the bull camp on NGVC, 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 $20.88 to $21.47 a share and then once it clears more overhead resistance at $22.46 a share with high volume. Look for volume on that move that hits near or above its three-month average action of 109,442 shares. If that breakout triggers, then NGVC will set up to re-test or possibly take out its 52-week high of $25 a share.

I would simply avoid NGVC or look for short-biased trades if after earnings it fails to trigger that breakout, and then drops back below its 50-day moving average of $19.72 a share with high volume. If we get that move, then NGVC will set up to re-test or possibly take out its next major support levels at $18 to $17.47 a share. Any move below $17.47 will then push NGVC within range of taking out its 52-week low of $17.20 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 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 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.