Stock Quotes in this Article: ANN, CSCO, PETM, PLCE, VLCCF

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.

 

Children’s Place Retail Stores

My first earnings short-squeeze trade idea is pure-play children’s specialty apparel retailer Children’s Place Retail Stores (PLCE), which is set to release numbers on Thursday before the market open. This company provides apparel, accessories and shoes for children from newborn to 10 years old. Wall Street analysts, on average, expect Children’s Place Retail Stores to report revenue of $353.26 million on a loss of 66 cents per share.

The current short interest as a percentage of the float for Children’s Place Retail Stores is extremely high at 18.8%. That means that out of the 21.54 million shares in the tradable float, 4.42 million shares are sold short by the bears. If this company can deliver the earnings news the bulls are looking for, then we could easily see a sizeable short-squeeze develop post-earnings.

From a technical perspective, PLCE is currently trading above both its 50-day and 200-day moving averages, which is bullish. This stock has been stuck inside of a trading range for the past two months, with shares moving between $48.50 on the downside and $52.16 on the upside. A move outside of that range post-earnings will likely setup the next major trend for PLCE.

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If you’re bullish on PLCE, then I would wait until after they report earnings and look for long-biased trades if this stock can manage to take out some overhead resistance at $51.96 to $52.16 a share with high volume. Look for volume on that move that hits near or above its three-month average volume of 482,173 shares. If we get that action, then look for PLCE to re-test and possibly take out its next major overhead resistance levels at $53.60 to $53.98 a share.

I would simply avoid PLCE or look for short-biased trades if after earnings it fails to trigger that breakout, and then drops below some near-term support at $48.44 a share with high volume. If we get that move, then look for PLCE to possibly trade down towards $44 a share or lower post-earnings.

Ann

Another potential earnings short-squeeze trade is specialty retailer Ann (ANN), which is set to release its numbers on Friday before the market open. This company, through its wholly owned subsidiaries, is a specialty retailer of women’s apparel, shoes and accessories sold primarily under the Ann Taylor and LOFT brands. Wall Street analysts, on average, expect Ann to report revenue of $586.27 million on earnings of 51 cents per share.

This company has beaten Wall Street estimates for the last four quarters in a row, and it’s coming off a quarter where it blew estimates away by 7 cents, after reporting a profit of 58 cents per share versus estimates of 51 cents per share. The current short interest as a percentage of the float for Ann is rather high at 10.7%. That means that out of the 43.35 million shares in the tradable float, 5.09 million shares are sold short by the bears.

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From a technical perspective, ANN is currently trading above both its 50-day and 200-day moving averages, which is bullish. This stock formed a double bottom chart pattern in June at $23.96 to $23.93 a share. After marking that bottom, shares of ANN have soared to its recent high of $28.65 a share. During that strong uptrend, shares of ANN have consistently been making higher lows and higher highs, which is bullish technical price action. That move has now pushed ANN within range of triggering a near-term breakout trade post-earnings.

If you’re in the bull camp on ANN, then I would wait until after they report earnings and look for long-biased trades if this stock breaks out above some near-term overhead resistance at $28.65 to $28.85 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 I fully expect ANN to re-test and take out its next major overhead resistance levels at $29.75 to $29.81 a share. If those levels are taken out with volume, then ANN should challenge its 2011 high of $32.49 a share post-earnings.

I would simply avoid ANN 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 $27 a share with heavy volume. If we get that action, then look for ANN to re-test and possibly take out its next major support levels at $26 to $25.75 a share post-earnings.

PetSmart

Another potential earnings short-squeeze trade is specialty retail player PetSmart (PETM), which is set to release numbers on Wednesday after the market close. PetSmart is a specialty provider of products, services and solutions for the lifetime needs of pets. Wall Street analysts, on average, expect PetSmart to report revenue of $1.60 billion on earnings of 66 cents per share.

This company has beaten Wall Street estimates for the last four quarters in a row, and it’s coming off a quarter where it smashed estimates by 12 cents per share, after reporting net income of 85 cents per share versus estimates of 73 cents per share. During the first quarter, profits jumped 33.5% to $94.7 million from $70.9 million in the same period last year. Revenue jumped 9.4% to $1.63 billion from $1.49 billion.

The current short interest as a percentage of the float for PetSmart is notable at 3.2%. That means that out of the 100.60 million shares in the tradable float, 3.46 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 PetSmart can deliver bullish the earnings news the bulls are looking for.

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From a technical perspective, PETM is currently trading above both its 50-day and 200-day moving averages, which is bullish. This stock has been trading range bound for the past three months, with shares moving between $69.80 on the upside and $64.21 on the downside. A move outside of that range post-earnings will likely setup the next major trend for PETM.

If you’re in the bull camp on PETM, then I would wait until after earnings and look for long-biased trades if the stock manages to trigger a breakout trade above some near-term overhead resistance levels at $69.75 to $69.80 a share with high volume. Look for volume on that move that hits near or above its three-month average action of 1,258,570 shares. If that breakout triggers, then I would look for PETM to trade north of $70 a share, and possible hit $75 to $80 a share. Keep in mind that if PETM takes out $69.97 a share, then it will be bullish technical price action, since the stock will be trading at a new 52-week high.

I would simply avoid PETM or look for short-biased trades if after earnings the stock fails to trigger that breakout, and then moves back below its 50-day moving average of $67.29 a share with high volume. If we get that move, then look for PETM to re-test and possibly take out its next major support level at $64.21 a share post-earnings.

Cisco Systems

My final earnings short-squeeze trade idea is communications equipment player Cisco Systems (CSCO), which is set to release numbers on Wednesday after the market close. This company designs, manufactures, and sells IP-based networking and other products related to the communications and information technology industry worldwide. Wall Street analysts, on average, expect Cisco Systems to report revenues of $11.60 billion on earnings of 46 cents per share.

This company has beaten Wall Street estimates for the last four quarters in a row, and it’s coming off a quarter where it beat estimates by one cent, after reporting a net income of 42 cents per share versus estimates of 41 cents per share. Profits for Cisco Systems have trended higher year-over-year by an average of 4.8% over the last four quarters.

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The current short interest as a percentage of the float for Cisco Systems sits at 1%. That means that out of the 5.35 billion shares in the tradable float, 52.39 million are sold short by the bears. This is far from a huge short interest as a percentage of the float, but it’s a large number of total shares short at over 52 million shares. Any bullish earnings news from Cisco Systems and we could see a decent short-covering rally develop post-earnings.

From a technical perspective, CSCO is currently trading above its 50-day moving average and below its 200-day moving average, which is neutral trendwise. This stock ran into heavy selling resistance back in April at around $21.12 to $20.08 a share, and it subsequently fell down to its recent low of $14.96 a share in July. Since hitting that low, shares of CSCO have started to rebound back above its 50-day moving average, and it now trades at just over $17 a share.

If you’re bullish on CSCO, then I would wait until after they report earnings and look for long-biased trades if it can manage to trigger a break out above some near-term overhead resistance at $17.79 a share, and then above its 200-day moving average of $18.30 a share with high volume. Look for volume on that move that registers near or above its three-month average volume of 41.2 million shares. If we get that action, then look for CSCO to trade up towards $19 to $20 a share post-earnings.

I would simply avoid CSCO or look for short-biased trades after earnings if it fails to trigger that breakout, and then moves back below some near-term support at its 50-day moving average of $16.58 a share with heavy volume. If we get that move, then CSCO will setup to re-test and possibly take out its next major support levels at $16 to $15 a share.

Cisco, which shows up on a list of 5 Dividend-Paying Stocks for the Next Decade, also was featured recently in "4 Tech Stocks to Trade (or Not)."

Knightsbridge Tankers

A potential earnings short-squeeze trade in the water transportation complex is Knightsbridge Tankers (VLCCF), which is set to release numbers on Wednesday before the market open. This company is engaged in the seaborne transportation of crude oil and dry bulk cargoes. Wall Street analysts, on average, expect Knightsbridge to report revenue of $21.85 million on earnings of 29 cents per share.

The current short interest as a percentage of the float for Knightsbridge Tankers is pretty high at 9.2%. That means that out of the 24.42 million shares in the tradable float, 2.11 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 71,000 shares.

From a technical perspective, VLCCF is currently trading above both its 50-day moving average and well below its 200-day moving average, which is neutral trendwise. This stock has been trading in a tight coiled range for the past two months, with shares moving between $8.94 on the upside and $8.25 on the downside. A move outside of that tight range post-earnings will likely setup the next major trend for VLCCF.

If you’re bullish on VLCCF, then I would wait until after they report earnings and look for long-biased trades if this stock can manage to break out above some near-term overhead resistance at $8.94 a share with high volume. Look for volume on that move that registers near or above its three-month average action of 264,453 shares. If we get that move, then look for VLCCF to re-test and possibly take out its next major overhead resistance levels at $10.02 to $11.18 a share.

I would avoid VLCCF or look for short-biased trades if after earnings it fails to trigger that breakout, and then moves below some key near-term support levels at $8.35 to $8.25 a share with heavy volume. If we get that action, then look for VLCCF to re-test and possibly take out its next major support level at $7.77 a share. Any high-volume move below $7.77 a share should be considered bearish action, since it will mean this stock is trading at a new 52-week low.

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.