Stock Quotes in this Article: DDD, EXPE, IMAX, UA, DNKN

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.

>>5 Rocket Stocks Ready to Rally

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.

>>5 Toxic Stocks to Sell 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 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.

Expedia

My first earnings short-squeeze candidate is online travel company Expedia (EXPE), which is set to release numbers on Thursday after the market close. Wall Street analysts, on average, expect Expedia to report revenue of $1.17 billion on earnings of $1.26 per share.

Expedia is shooting to beat Wall Street estimates for the third quarter in a row. During the last quarter, it reported net income of 82 cents per share vs. Wall Street estimates of 62 cents per share, and in the quarter before, the company topped forecasts by 12 cents with a net income of 17 cents vs. consensus estimates of 5 cents per share.

>>5 Stocks Hedge Funds Love -- and So Should You

The current short interest as a percentage of the float for Expedia is pretty high at 10.9%. That means that out of the 101 million shares in the tradable float, 10.47 million shares are sold short by the bears. This is a decent short interest, so any positive earnings news could easily set off a large short squeeze post-earnings.

From a technical perspective, EXPE is currently trading above its 200-day moving average and below its 50-day moving average, which is neutral trendwise. This stock recently ran into some stiff resistance at around $60 to $59 a share, and shares have subsequently dropped back below its 50-day to its recent low of $51.41 a share. During that slide lower, shares of EXPE have been making lower highs and lower lows, which is bearish technical price action.

If you’re bullish on EXPE, then I would wait until after its report and look for long-biased trades once it manages to break out above its 50-day at $54.53 a share, and then above some near-term overhead resistance at $56 a share with high volume. Look for volume on that move that registers near or above its three-month average volume of 3.1 million shares. If we get that action, then look for EXPE to re-test or possibly take out its next major overhead resistance levels at $59.90 to $60.29 a share post-earnings.

I would simply avoid EXPE or look for short-biased trades if after earnings it fails to trigger that breakout and then drops below some near-term support at $51.41 to $50.47 a share with heavy volume. If we get that move, then EXPE will setup to re-test or possibly take out its next major support levels at $43.56 to $43.44 a share.

Dunkin Brands Group

Another potential earnings short-squeeze play is Dunkin Brands Group (DNKN), which is set to release its numbers on Thursday before the market open. This company is a franchisor of quick-service restaurants serving hot and cold coffee and baked goods, as well as hard serve ice cream. Wall Street analysts, on average, expect Dunkin Brands Group to report revenue of $174.05 million on earnings of 35 cents per share.

Just recently, Wells Fargo said it expects Dunkin Brands’ multiple to advance in 2013, due partly to what it sees as high visibility into continued mid-teens EPS growth in 2013 and 2014. The firm maintains an outperform rating.

>>5 Stocks Ready to Break Out

The current short interest as a percentage of the float for Dunkin Brands Group is rather high at 10.7%. That means that out of the 110.88 million shares in the tradable float, 11.13 million shares are sold short by the bears. The bears have also been increasing their bets from the last reporting period by 5.2%, or by about 545,000 shares. If the bears are caught leaning too hard into this quarter, then we could easily see a sharp short-covering rally develop post-earnings.

From a technical perspective, DNKN is currently trading above both its 50-day and 200-day moving averages, which is bullish. This stock has been uptrending fairly strong for the last two months, with shares rising from a low of $27.93 to its recent high of $33.09 a share. During that uptrend, shares of DNKN have been making higher lows and higher highs, which is bullish technical price action. That move has now pushed DNKN within range of triggering a near-term breakout trade.

If you’re in the bull camp on DNKN, then I would wait until after its report and look for long-biased trades if this stock can manage to break out above some near-term overhead resistance levels at $32.50 to $33.09 a share with high volume. Look for volume on that move that hits near or above its three-month average action of about 2 million shares. If DNKN triggers that move, then this stock will setup to re-test or possibly take out its next major overhead resistance levels at $36.11 to $37.02 a share post-earnings.

I would simply avoid DNKN or look for short-biased trades if after earnings this stock fails to trigger that breakout, and then drops back below its 50-day moving average of $30.19 a share with high volume. If we get that move, then DNKN will setup to re-test or possibly take out its next major support levels at $28.50 to $27.93 a share.

3D Systems

Another potential earnings short-squeeze trade is 3D Systems (DDD), a provider of 3D content-to-print solutions, which is set to release numbers on Thursday before the market open. Wall Street analysts, on average, expect 3D Systems to report revenue of $87.29 million on earnings of 27 cents per share.

During the last quarter, 3D Systems reported revenue of $83.6 million. GAAP reported sales were 52% higher than the prior year quarter at $55.1 million. Also during the last quarter, earnings per share came in at 16 cents. GAAP earnings per share of 16 cents for the second quarter were 38% lower than the prior-year quarter of 26 cents per share.

>>3 Tech Stocks Hedge Funds Are Buying

The current short interest as a percentage of the float for 3D Systems is extremely high at 21.1%. That means that out of the 50.36 million shares in the tradable float, 10.62 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 300,000 shares. This is a huge short interest on a stock with a relative low float. If the bulls get the news they’re looking for, then this stock could explode higher post-earnings.

From a technical perspective, DDD is currently trading above its 200-day moving average and just below its 50-day moving average, which is neutral trendwise. This stock has been uptrending slightly for the last month, with shares rising from a low of $32.35 to its recent high of $40.59 a share. During that uptrend, shares of DDD have been making mostly higher lows and higher highs, which is bullish technical price action. That move has now pushed DDD within range of triggering a near-term breakout trade post-earnings.

If you’re bullish on DDD, then I would wait until after its report and look for long-biased trades if this stock can manage to break out above some near-term overhead resistance levels at $40.59 to $40.96 a share with high volume. Look for volume on that move that tracks in at near or above its three-month average action of 1.4 million shares. If DDD triggers that breakout, then this stock will setup to re-test or possibly take out its next major overhead resistance level and its 52-week high at $44.80 a share. Any move above $44.80 should setup DD to trend north of $50 a share.

I would avoid DDD or look for short-biased trades if after earnings it fails to trigger that breakout, and then drops below some key near-term support levels at $36.18 to $32.35 a share with high volume. If we get that action, then DDD will setup to re-test or possibly take out its 200-day moving average of $30.11 a share post-earnings.

Under Armour

Another earnings short-squeeze trade candidate is apparel player Under Armour (UA), which is set to release numbers on Thursday before the market open. This company is engaged in the development, marketing and distribution of apparel, footwear and accessories for men, women and youth. Wall Street analysts, on average, expect Under Armour to report revenue of $576.36 million on earnings of 52 cents per share.

During the last quarter, Under Armour beat Wall Street estimates by once cent, coming in at a profit of 6 cents per share versus estimates of 5 cents per share. That marked the fourth straight quarter where the company topped Wall Street estimates. This company has averaged year-over-year revenue growth of 31.3% over the last four quarters.

The current short interest as a percentage of the float for Under Armour is extremely high at 17.1%. That means that out of the 78.59 million shares in the tradable float, 13.34 million shares 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 232,000 shares. If the bears are caught pressing their bets into the quarter, then this stock could explode to the upside post-earnings.

From a technical perspective, UA is currently trading above its 200-day moving average and just below its 50-day moving average, which is neutral trendwise. This stock has been uptrending modestly for the last month and change, with shares moving from a low of $53.28 to its recent high of $60.20 a share. During that uptrend, shares of UA have been making mostly higher lows and higher highs, which is bullish technical price action. That move has now pushed UA within range of triggering a near-term breakout trade post-earnings.

If you’re bullish on UA, then I would wait until after its report and look for long-biased trades if this stock can manage to break out above some near-term overhead resistance levels at $60.20 to $60.96 a share with high volume. Look for volume on that move that hits near or above its three-month average volume of 1.5 million shares. If we get that move, then look for UA to enter new 52-week high territory above $60.96 a share. Some possible upside targets for UA on that move are $65 to $75 a share post-earnings.

I would avoid UA or look for short-biased trades if after earnings it fails to trigger that breakout, and then drops below some key near-term support at $56 a share with heavy volume. If we get that action, then UA will setup to re-test or possibly take out its next major support levels at $54.20 to $53.28 a share. Any high-volume move below $53.28 a share could send UA back towards its 200-day at $49.57 a share post-earnings.

Imax

My final earnings short-squeeze play toay is motion pictures player Imax (IMAX), which is set to release numbers on Thursday before the market open. This entertainment technology company specializes in motion picture technologies and large-format motion picture presentations. Wall Street analysts, on average, expect Imax to report revenue of $76.06 million on earnings of 21 cents per share.

On Monday, Hudson Square Research initiated coverage on Imax with a buy rating and a price target of $28 per share. Recent new movie releases like Dark Knight Rises, Resident Evil: Retribution, and The Amazing Spiderman, are expected to give a decent boost to revenue for the current quarter.

The current short interest as a percentage of the float for Imax is extremely high at 23.9%. That means that out of the 55.34 million shares in the tradable float, 13.20 million shares are sold short by the bears. This is a very large short interest on a stock with a relatively low tradable float. If the bulls get the news they’re looking for, then this stock could skyrocket higher post-earnings.

From a technical perspective, IMAX is currently trading above its 50-day moving average and below its 200-day moving average, which is neutral trendwise. This stock has been uptrending slightly for the last two months, with shares rising from a low of $18.85 to its recent high of $22.46 a share. During that uptrend, shares of IMAX have been making mostly higher lows and higher highs, which is bullish technical price action. That move has now pushed IMAX within range of triggering a near-term breakout trade.

If you’re in the bull camp on IMAX, then I would wait until after its earnings report and look for long-biased trades if this stock manages to break out above some near-term overhead resistance levels at $22.46 to $22.50 a share with high volume. Look for volume on that move that registers near or above its three-month average action of 1 million shares. If we get that move, then IMAX will setup to re-test or possibly take out its next major overhead resistance levels at $23.95 to $25.99 a share post-earnings.

I would simply avoid IMAX or look for short-biased trades if after earnings it fails to trigger that breakout, and then moves back below some key near-term support levels at $20.67 to $20.10 a share with high volume. If we get that move, then IMAX will setup to re-test or possibly take out its next major support levels at $18.85 to $18.29 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:







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.