Stock Quotes in this Article: FDO, FINL, GBX, TIBX, WOR

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 timeframe that your profits add up quickly.

>>7 Stocks Under $10 With Relative Strength

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. 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 rip higher, and its acting technically very bullish. Remember, even when you have that conviction and you have done your due diligence, the stock can still get hammered if the street doesn’t like the numbers or guidance.

>>ACTIVE STOCK TRADERS: Check out Stockpickr’s special offer for Real Money, headlined by Jim Cramer, now!

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, and then jump in and trade the prevailing trend on a heavily-shorted stock that’s reporting its numbers.

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

Finish Line

My first earnings short-squeeze play is specialty retail player Finish Line (FINL), which is set to report results on Thursday before the market open. This company operates as a mall-based specialty retailer in the U.S. It operates Finish Line stores that offer performance and athletic casual footwear, apparel and accessories for men, women and kids. Wall Street analysts, on average, expect Finish Line to report revenue of $320.73 million on earnings of 23 cents per share.

This company has met or exceeded Wall Street earnings per share estimates over the last four quarters. The current short interest as a percentage of the float for Finish Line is rather high at 10.2%. That means that out of the 50.50 million shares in the tradable float, 5.14 million shares are sold short by the bears. This is a decent short interest on a stock with a relatively low float. If Finish Line can deliver what the bulls are looking for, then this stock could see a large short-squeeze post-earnings.

>>5 Rocket Stocks Worth Buying This Week

From a technical perspective, FINL is currently trading below both its 50-day and 200-day moving averages, which is bearish. This stock has been downtrending hard since late March, with shares dropping from a high of over $26.09 to a recent low of $17.87 a share. During that sharp move lower, shares of FINL have consistently made lower highs and lower lows, which is bearish technical price action. In fact, this stock is trading so poorly it’s only trading about 2 points off its 52-week low of $16.42 a share as we approach their earnings report.

If you’re bullish on FINL, then I would wait until after it reports earnings and look for long-biased trades if this stock can manage to trigger a breakout above some near-term overhead resistance at $19.00 to $19.62 a share with high-volume. Look for volume on that move that registers near or above its three-month average action of 1.2 million shares. If we get that move, then FINL has a great chance of re-testing its May high of $22.76 a share post-earnings.

I would simply avoid FINL or look for short-biased trades if after earnings it fails to trigger that breakout, and then drops below some major past support at $17.66 to $16.25 a share with high-volume. If we get that move, then FINL will be trading at a new 52-week low and it could easily hit $15 a share or lower.

Family Dollar Stores

Another potential earnings short-squeeze play is specialty retailer Family Dollar Stores (FDO), which is set to release its numbers on Thursday before the market open. This company operates a chain of self-service retail discount stores primarily for low and middle income consumers in the U.S. Wall Street analysts, on average, expect Family Dollar Stores to report revenue of $2.37 billion on earnings of $1.07 per share.

Just this morning, S&P Capital IQ raised its rating on the stock to buy from hold. The firm expects demand at Family Dollar to benefit from favorable weather and lower gasoline prices in the short term. This company is also looking to register its fifth-straight quarter of revenue increases when it reports this week.

>>4 Stocks the Pros Hate -- But You Should Love

The current short interest as a percentage of the float for Family Dollar Stores sits at 3.2%. That means that out of the 96.40 million shares in the tradable float, 3.6 million shares are sold short by the bears. This isn’t a huge short interest, but it’s more than enough to spark a short-covering rally if Family Dollar Stores can report a solid number and raise forward guidance.

From a technical perspective, FDO is currently trading above both its 50-day and 200-day moving averages, which is bullish. This stock has been uptrending strong since March, with shares soaring from a low of $52.90 to a recent high of $74.73 a share. During that uptrend, shares of FDO have consistently made higher lows and higher highs, which is bullish technical price action. That said, the stock recently pulled back off that high if $74.73 to a near-term low of $69.30 a share.

If you’re in the bull camp on FDO, then I would wait until after it reports numbers and look for long-biased trades if this stock can manage to take out some near-term overhead resistance at $72 to $74.73 a share with high volume. Look for volume on that move that hits near or above its three-month average action of 1.8 nukkuib shares. If we get that action, then FDO will enter new 52-week high territory, and the stock could easily print north of $80 post-earnings.

I would simply avoid FDO or look for short-biased trades if after earnings this stock fails to trigger that breakout, and then takes out some near-term support at $69.30, and then its 50-day moving average of $67.98 a share with high volume. If we get that move, then FDO could easily trade down towards its next significant support levels at $67 to $65 a share or possibly much lower.

As of the most recently reported quarter, Family Dollar was one of Third Point's holdings and also showed up in Bill Ackman's portfolio.

Worthington Industries

A potential earnings short-squeeze trade in the iron and steel complex is Worthington Industries (WOR), which is set to release numbers on Thursday before the market open. This is a diversified metals processing company, focused on steel value-added steel processing and manufactured metal products. Wall Street analysts, on average, expect Worthington Industries to report revenue of $682.41 million on earnings of 53 cents per share.

The current short interest as a percentage of the float for Worthington Industries is pretty high at 9.8%. That means that out of the 51.97 million shares in the tradable float, 5.10 million shares are sold short by the bears. The bears have also been increasing their bets from the last reporting period by 3.6%, or by about 179,000 shares. If the bears are caught leaning too hard into this quarter, then we could easily see a sharp short squeeze develop for WOR post-earnings.

>>5 Foreign Stocks That Could Pop This Summer

From a technical perspective, WOR is currently trading above both its 50-day and 200-day moving averages, which is bullish. This stock recently hit a low of $15.45 a share, and since then it has rallied back above both its 50-day and 200-day moving averages. That move has now pushed WOR within range of triggering a near-term breakout trade post-earnings.

If you’re bullish on WOR, then I would wait until after its report and look for long-biased trades if this stock can manage to trigger a break out above some near-term overhead resistance at $17.63 to $17.94 a share with high volume. Look for volume on that move that hits near or above its three-month average volume of 657,928 shares. If we get that action, then WOR has a solid chance of hitting $19 to $19.85 a share post-earnings if the bulls gain full control of this stock.

I would avoid WOR or look for short-biased trades if after earnings it fails to trigger that breakout, and then drops below its 50-day at $17.03 and its 200-day at $16.87 a share with high-volume. If we get that move, then look for WOR to re-test and possibly take out its recent low of $15.45 a share if the bears hammer this stock down post-earnings.

Tibco Software

One potential earnings short-squeeze play in the software and programming complex is Tibco Software (TIBX), which is set to release numbers on Thursday after the market close. This company is a provider of middleware and infrastructure software. Wall Street analysts, on average, expect Tibco Software to report revenue of $244.87 million on earnings of 23 cents per share.

This company has topped Wall Street estimates for the last four quarters, and it’s coming off a quarter where it beat estimates by one cent, after reporting net income of 15 cents per share versus estimates of 14 cents per share. Tibco Software has averaged year-over-year revenue growth of 22.7% over the last four quarters. This company is looking to register its fourth quarter in a row of income increases. Net income jumped 35.6% in the third quarter of the last fiscal year and 38.4% in the fourth quarter of the last fiscal year.

>>5 Bargain Stocks With Tons of Cash

The current short interest as a percentage of the float for Tibco Software is notable at 3.4%. That means that out of the 152.45 million shares in the tradable float, 5.28 million shares are sold short by the bears. The bears have also been increasing their bets from the last reporting period by 3.5%, or by about 179,000 shares. If the bears are caught pressing their bets too hard into this quarter, then we could easily see a tradable short-covering rally for shares of Tibco Software.

From a technical perspective, TIBX is currently trading below both its 50-day and 200-day moving averages, which is bearish. This stock has sold off hard from its May high of $34.15 to a recent low of $25.00 a share. After that steep drop, shares of TIBX have started to trend sideways between $25 on the downside and $28.24 on the upside. A move outside of that range post-earnings will likely setup the next major trend for TIBX.

If you’re in the bull camp on TIBX, I would look for long-biased trades if after earnings it triggers a breakout above some near-term overhead resistance at $28.24 to $29.98 a share with high volume. Look for volume on that move that registers near or above its three-month average action of 3,154,380 shares. If we get that action, then TIBX could easily hit $32 to $34 a share post-earnings if the bulls gain full control of this stock.

I would simply avoid TIBX or look for short-biased trades after earnings the stock fails to trigger that breakout, and then moves below some near-term support at $25.64 to $25.00 a share with high volume. If we get that action, then TIBX could re-test and possibly take out its next significant support level at $22.90 a share.

Greenbrier

My final earnings short-squeeze trade idea today is chemical manufacturing player Greenbrier (GBX), which is set to release numbers on Thursday after the market close. This company engages in the design, manufacture and marketing of railroad freight car equipment in North America and Europe. Wall Street analysts, on average, expect Greenbrier to report revenue of $519.39 million on earnings of 60 cents per share.

If you’re looking for a heavily-shorted beaten-down mid-cap stock heading into its earnings report this week, then make sure to check out shares of Greenbrier. This stock has been hammered by the bears so far in 2012 with shares off by over 38%.

The current short interest as a percentage of the float for Greenbrier is pretty high at 9.1%. That means that out of the 23.95 million shares in the tradable float, 2.19 million are sold short by the bears. The bears have also been increasing their bets from the last reporting period by 20.5%, or by about 372,000 shares. Since this stock is so beaten-down heading into its report, we could see a large short-squeeze develop if the bears are caught pressing their luck here.

From a technical perspective, GBX is currently trading below both its 50-day and 200-day moving averages, which is bearish. This stock has been destroyed by the sellers over the last six months, with shares dropping from a high of $26.28 to a recent low of $13.10 a share. During that big-time selloff, shares of GBX have consistently made lower highs and lower lows, which is bearish technical price action. That said, the stock has started to change that trend a bit over the last month with shares making higher lows and setting up for higher highs.

If you’re bullish on GBX, then I would wait until after its report and look for long-biased trades if it can manage to trigger a breakout above some near-term overhead resistance at $16.33 a share with high-volume. Look for volume on that move that registers near or above its three-month average action of 599,228 shares. If we get that action, then GBX has a great chance of re-testing and possibly taking out its 200-day moving average of $19.35 a share.

I would simply avoid GBX or look for short-biased trades if it fails to trigger that breakout, and then moves back below some near-term support at $14.25 a share with heavy volume. If we get that move, then GBX could easily re-test and possibly take out its May low of $13.10 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.

RELATED LINKS:

>>4 Stocks Poised to Break Out
>>7 Dividend Stocks That Want to Pay You More Cash

>>5 Stocks Immune to Europe's Problems

Follow Stockpickr on Twitter and become a fan on Facebook.

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.