Stock Quotes in this Article: APOG, BBBY, CLC, MU, SONC

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.

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.

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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.

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.

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

 

Bed Bath & Beyond

My first earnings short-squeeze play is specialty retailer Bed Bath & Beyond (BBBY), which is set to report results on Wednesday after the market close. This company sells a range of domestics merchandise and home furnishings. Wall Street analysts, on average, expect Bed Bath & Beyond to report revenue of $2.25 billion on earnings of 84 cents per share.

Wall Street is looking for Bed Bath & Beyond to report first-quarter earnings growth of 17% and a rise of 6.4% in sales this week. This company has posted double-digit EPS gains for 12 quarters in a row, on high single-digit or low double-digit revenue growth. Bed Bath & Beyond has also beaten Wall Street profit estimates in seven of the last eight quarters.

The current short interest as a percentage of the float for Bed Bath & Beyond sits at 2.5%. That means that out of the 223.77 million shares in the tradable float, 5.65 million shares are sold short by the bears. This isn’t a huge short interest, but it’s more than enough to spark a solid short-covering rally if BBBY delivers the numbers the bulls are looking for.

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From a technical perspective, BBBY is currently trading above both its 50-day and 200-day moving averages, which is bullish. This stock has been uptrending strong for the past five months, with shares soaring from a low of $57.58 to a high of $74.67 a share. During that run, shares of BBBY have consistently made higher lows and higher highs, which is bullish technical price action. That move has now pushed BBBY within range of triggering a major breakout trade.

If you’re bullish on BBBY, then I would wait until after they report earnings and look for long-biased trades if this stock can manage to trigger a break out to a new 52-week high above $74.67 a share with high-volume. Look for volume on that move that hits near or above its three-month average action of 2.6 million shares. If we get that move, then look for BBBY will be trading in all-time high territory. Target a move towards $80 to $85 a share if the bulls gain full control of this stock post-earnings.

I would simply avoid BBBY or look for short-biased trades if after earnings it fails to trigger that breakout to new 52-week highs, and then drops below some near-term support at $72 a share with high volume. If we get that move, then BBBY could easily re-test and possibly take out its 50-day moving average of $70.43 a share post-earnings.

Clarcor

Another potential earnings short-squeeze play is diversified machinery player Clarcor (CLC), which is set to release its numbers on Wednesday after the market close. This company is a provider of filtration products, filtration systems and services, and consumer and industrial packaging products. Wall Street analysts, on average, expect Clarcor to report revenue of $305.68 million on earnings of 70 cents per share.

If you’re looking for a stock that’s trending up heading into its earnings report this week, then make a sure to check out shares of Clarcor. This stock is risen about 5% in the last six months and it’s trading just four points off its 52-week high of $54.22 a share.

The current short interest as a percentage of the float for Clarcor is notable at 4.7%. That means that out of the 49.34 million shares in the tradable float, 2.34 million shares are sold short by the bears. The bears have also been increasing their bets from the last reporting period by 19.9%, or by about 389,000 shares. If the bears are caught leaning too hard into this quarter, then we could easily see a sizable short squeeze develop post-earnings.

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From a technical perspective, CLC is currently trading above both its 50-day and 200-day moving averages, which is bullish. During the last two months and change, shares of CLC have trended higher from a low of $45.84 to a high of $50.87 a share. During that right, shares of CLC have consistently made higher lows and higher highs, which is bullish technical price action. That move now sets up CLC to trigger a near-term breakout trade post-earnings.

If you’re in the bull camp on CLC, then I would wait until after they report numbers and look for long-biased trades if this stock can manage to trigger a break a near-term breakout above $50.87 to $52.03 a share with high volume. Look for volume on that move that registers near or above its three-month average action of 291,239 shares. If we get that action, then CLC could re-test and possibly take out its 52-week high of $54.22 a share.

I would simply avoid CLC or look for short-biased trades if after earnings this stock fails to trigger that breakout, and then trades back below both its 50-day moving average at $48.84 and its 200-day moving average at $48.34 a share with high volume. If we get that move, then look for CLC to trade back to $47 to $46 a share or possibly lower if the bears hammer this down post-earnings.

Apogee Enterprises

One potential earnings short-squeeze trade in the industrial goods complex is Apogee Enterprises (APOG), which is set to release numbers on Tuesday after the market close. This company is involved in the design and development of value-added glass products, services and systems. Wall Street analysts, on average, expect Apogee Enterprises to report revenue of $160.74 million on earnings of 3 cents per share.

The current short interest as a percentage of the float for Apogee Enterprises stands at 4.3%. That means that out of the 28.08 million shares in the tradable float, 1.19 million shares are sold short by the bears. The bears have also been increasing their bets from the last reporting period by 30.4%, or by about 276,000 shares. If the bears are caught learning too hard into this quarter, then we could easily see a large short-squeeze develop for shares of Apogee Enterprises.

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From a technical perspective, APOG is currently trading above both its 50-day and 200-day moving averages, which is bullish. From April to mid-May, this stock uptrended strong from $12.10 to a high of $16.34 a share. During that move, shares of APOG made higher lows and higher highs, which is bullish technical price action. After that run, shares of APOG have now started to trend sideways between $14.14 and $15.35 a share. A move outside of that range post-earnings should set this stock up for its next major trend.

If you’re bullish on APOG, then I would wait until after they report and look for long-biased trades if this stock can manage to trigger a break out above some near-term overhead resistance at $15.35 a share with high volume. Look for volume on that move that hits near or above its three-month average volume of 150,488 shares. If we get that action, then APOG could take out its 52-week high of $16.44 a share.

I would avoid APOG or look for short-biased trades if after earnings this stock fails to trigger that breakout, and then drops below its 50-day moving average of $14.72 and below some major support at $14.14 a share with high volume. If we get that move, then target a drop in APOG towards $13 to $12 a share if the bears slam this stock lower post-earnings.

Sonic

A potential earnings short-squeeze trade in the restaurants complex is Sonic (SONC), which is set to release numbers on Wednesday after the market close. This company operates and franchises chain of drive-in restaurants (Sonic Drive-Ins) in the U.S. Wall Street analysts, on average, expect Sonic to report revenue of $681.10 million on earnings of 13 cents per share.

Sterne Agee has upgraded shares of Sonic this morning from a neutral to a buy rating with an $11 price target. Sterne Agree comments, “The primary catalyst for our upgrade is that we believe the recent improvements in SSS is likely sustainable over the next several quarters given core product quality improvements, menu innovation and new advertising. In addition, we view the roll-out of a new POS system and the development of a new lower-cost prototype as longer-term positives. We also note an attractive FCF yield of 13%.”

The current short interest as a percentage of the float for Sonic is rather high at 7.3%. That means that out of the 85.59 million shares in the tradable float, 3.26 million shares are sold short by the bears. The bears have also been increasing their bets from the last reporting period by 21.4%, or by about 729,000 shares.

From a technical perspective, SONC is currently trading above both its 50-day and 200-day moving averages, which is bullish. This stock formed a double bottom in April to mid-May at around $6.84 to $6.88 a share. After forming that bottom, shares of SONC have soared and trended up toward a recent high of $8.95 a share. During that move, shares of SONC have consistently made higher lows and higher highs, which is bullish technical price action. That move has now pushed SONC within range of a near-term breakout trade.

If you’re in the bull camp on SONC, I would look for long-biased trades if after earnings it triggers a break out above some past overhead resistance at $9.82 a share with high volume. Look for volume on that move that hits near or above its three-month average volume of 721,352 shares. If we get that action, then SONC could re-test and possibly take out its 52-week high of $11.34 a share if the bulls gain full control of this stock post-earnings.

I would simply avoid SONC or look for short-biased trades after earnings the stock fails to trigger that breakout, and then moves below some near-term support at $8.50 a share with high-volume. If we get that action, then SONC should setup to re-test its next significant support levels at $7.91 to $7.73 a share if the bears smack this stock lower post-earnings.

Micron Technology

An earnings short-squeeze trade idea in the semiconductor complex is Micron Technology (MU), which is set to release numbers on Wednesday after the market close. This is a global manufacturer and marketer of semiconductor devices, principally Dynamic Random Access Memory, NAND Flash and NOR Flash memory, as well as other memory technologies. Wall Street analysts, on average, expect Micron Technology to report revenue of $2 billion on a loss of 20 cents per share.

If you’re looking for a heavily-shorted beaten-down stock heading into its earnings report this week, then make a sure to check out shares of Micron Technology. This stock has been smashed by the bears during the last three months, with shares dropping over 30%. That sharp drop could be setting up Micron Technology for a rebound trade post-earnings if the company can deliver the numbers the bulls are looking for.

The current short interest as a percentage of the float for Micron Technology is rather high at 7%. That means that out of the 961.20 million shares in the tradable float, 66.86 million are sold short by the bears.

From a technical perspective, MU is currently trading below both its 50-day and 200-day moving averages, which is bearish. This stock topped out in March at around $9.16 to $8.98 a share. Following that top, shares of MU have downtrended hard to a recent low of $5.30 a share. During that downtrend, shares of MU have consistently made lower highs and lower lows, which is bearish technical price action. That said, this sock has started to trend sideways for the last month at around $5.30 to $6.15 a share. A move outside of that sideways pattern post-earnings should setup MU for its next major trend.

If you’re bullish on MU, then I would wait until after they report and look for long-biased trades if it can take out some near-term overhead resistance at $6.04 to $6.15 a share with high volume. Look for volume on that move that’s near or above its three-month average action of 32.35 million shares. If we get that move, then I would look to add to MU once it sustains a move or close above both its 50-day moving average of $6.26 and its 200-day moving average of $6.67 a share. Target a pop towards $7 to $8 a share if the bulls spark a solid short-covering rally.

I would simply avoid MU or look for short-biased trades if it fails to trigger that breakout, and then moves below some near-term support at $5.65 to $5.30 a share with heavy volume. If we get that move, then I would look for MU to re-test and possibly take out some major support at $5.06 a share. The next major support area after $5.06 sits at around $4.50 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 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.