Stock Quotes in this Article: AVAV, CONN, HITK, MW, TITN

WINDERMERE, Fla. (Stockpickr) -- News events have the power to create big volatility in stocks, and one event that can move them substantially higher or lower is an earnings release. Combine a bullish earnings report with a stock that’s heavily shorted, and you have the fuel that can ignite a large short squeeze.

Short-sellers hate being caught short a stock that announces bullish earning and forward guidance. When this happens, we often see a tradable short squeeze develop as the bears rush to cover their positions and avoid huge losses. Even the most skilled short-sellers know that it’s never a great idea to stay short once earnings spark a big short-covering rally.

This is precisely why I search the market for heavily shorted stocks that are about to report earnings. You only need to find a couple of these candidates 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.

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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 from off a short squeeze. That way, you let 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 by waiting, you will miss a lot of the move. That’s why it’s worth betting prior to the report if you have a very strong conviction that the stock is going to explode higher.

    Here’s a look at a number of stocks that could experience big short squeezes when they report earnings this week.

    Hi-Tech Pharmacal

    My first earnings short-squeeze play is Hi-Tech Pharmacal (HITK), which is set to report its results on Wednesday before the market open. This is a specialty manufacturer and marketer of prescription, over-the-counter and nutritional products. Wall Street analysts, on average, expect Hi-Tech Pharmacal to report revenue of $54.07 million on earnings of 84 cents per share.

    This company is on deck to beat earnings for the fourth consecutive quarter. Hi-Tech Pharmacal’s profits have trended up year-over-year by an average of 37% over the past five quarters. Revenue has also trended up for the past three quarters in row. I like this name for an earnings short-squeeze play since the stock has held up very well during the latest market slide. In fact, shares of HITK are currently trading about three points off its 52-week high of $32.83 a share, which shows that the stock is still in a strong uptrend and could be poised for higher prices off a solid earnings report.

    The current short interest as a percentage of the float for Hi-Tech Pharmacal is a rather large 13%, which means that out of the 10.13 million shares in the tradable float, 1.32 million are sold short by the bears. This is a high short interest on a stock with an extremely low float. It’s worth pointing out that the bears have also been increasing their bets from the last reporting period by 5.5%, or about 68,000 shares. A solid beat and raise out of Hi-Tech could easily set off a massive short covering rally.

    From a technical standpoint, this stock is currently trading above both its 50-day and 200-day moving averages, which is bullish. During the last month, the stock has found some buying support at its 200-day moving average and has been printing higher lows, which is bullish.

    I would look to buy this stock after its report once it trades above some near-term overhead resistance at around $29 to$30 a share on strong volume. I would look for volume on Wednesday that’s tracking in close to or greater than the three-month average volume of 161,000 shares. I would add aggressively to any long position if you see this stock break out above $33 a share post-earnings.

    I would only get short if Hi-Tech Pharmacal trades below $27 a share following their earnings report. I would add to any short position if the stock then takes out its 50-day moving average of $25.17 on heavy volume. Target a drop back toward $22 to $20 a share if the bears gain control of this stock post-earnings.

    AeroVironment

    Another stock with the potential to see a notable earnings short squeeze is AeroVironment (AVAV), which is set to release results on Wednesday after the market close. This company designs, develops, produces and supports unmanned aircraft systems and efficient energy systems for various industries and governmental agencies. Wall Street analysts, on average, expect AeroVironment to report revenue of $61.31 million on earnings of 1 cent per share.

    AeroVironment is on track to beat Wall Street estimates for its fifth consecutive quarter if the company can manage to deliver another solid number. Revenue has also trended up for the past three straight quarters. This stock dropped over 10 points during the latest market selloff, but it has bounced from August lows of $24 a share to its current price of just over $28 a share. Keep in mind that this stock has a history of making big percentage moves post-earnings.

    The current short interest as a percentage of the float for AeroVironment is large at 14.4%. That means that out of the 16.73 million shares in the tradable float, 2.54 million are sold short by the bears. This is another high short interest situation on a stock with a very low tradable float. If this company can beat and issue bullish guidance, then we could easily see a large short squeeze.

    From a technical standpoint, this stock is currently trading below both its 50-day and 200-day moving averages, which is bearish. In fact, last week the stock failed right at its 50-day moving average of $30.04 and it has now lost its 200-day of $29.16. That said, the stock is still off its recent low of $24 a share and it has been making higher highs and higher lows for most of August.

    I would be a buyer of this stock after its release their results if it trades above some near-term overhead resistance at $30.15 on strong volume. Look for volume during Wednesday’s trading session that’s on track to be close to or greater than its three-month average action of 347,200 shares. I would add to any long position if it then trades above $33 and target a run back towards $35 or possibly even higher.

    I would only short this stock after its report if it drops below $26 a share on strong volume. I would add to any short position if it then drops below $24 a share, and I would target a drop back toward its next major support zones at $22 to $21 a share.

    Conn’s

    One earnings short-squeeze candidate in the electronics stores complex is Conn’s (CONN), which is set to release numbers on Wednesday before the market open. This company operates as a specialty retailer of home appliances, consumer electronics, home office equipment, lawn and garden products, mattresses and furniture in the U.S. Wall Street analysts, on average, expect Conn’s to report revenue of $184.83 million on earnings of 11 cents per share.

    This stock has been beaten down huge in front of the quarter, since shares have dropped from a late July high of $9.98 a share to its current price of just above $5 a share. The relative strength index shows a reading of 34 which is a highly oversold level for any stock. Oversold can always get more oversold, but if Conn’s can deliver anything positive for this quarter and beyond, then this stock could easily see a sharp bounce higher off current levels.

    Jefferies recently issued a research report on Conn’s, raising its price target to $6 from $5.50 and maintaining its hold rating on the stock. In a note to clients, Jefferies said that Conn’s is managing its balance sheet, but investors will continue to place a low valuation on the stock until top-line trends improve.

    The current short interest as a percentage of the float for Conn’s is an extremely large 25.9%, which means that out of the 14.26 million shares in the tradable float, 3.73 million are sold short by the bears. This is another situation of a stock with a large short interest and a low tradable float. Since shares of Conn's have dropped around 50% in the last two months, any good news could spark a huge short-covering bounce.

    From a technical standpoint, this stock is currently trading below both its 50-day and 200-day moving averages, which is bearish. The stock has also been stuck in a nasty downtrend since it topped out above $9 a share in July. During that downtrend, shares of Conn's have been making lower highs and lower lows, which is also bearish. That said, the stock has also started to stabilize and find some buying interest at around $5 a share during the past few weeks.

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    The way I would play this name is to be a buyer post-earnings if the stock can hold above its most recent low of $4.97 a share. If that level doesn’t get taken out after they report, then I would be a buyer of this stock. I would add to any long position once it then trades above its 50-day moving average of $5.63 on strong volume. Look for volume during Wednesday’s trading session that’s tracking in close to or greater than its three-month average action of 249,6000 shares. I would target a run back towards its 50-day moving average of $7.52 a share if the bulls can spark a short-squeeze.

    I would only short this name if you see it drop below $4.97 a share following their earnings report on big volume. I would add to any short trade if it then takes out its next significant support zone at $4.14 to $4.10 a share, and target a fall back to $3.50 or lower if the bears gain total control of this stock post-earnings.

    Men’s Wearhouse

    If you’re looking for an earnings short-squeeze play in the retail apparel sector, then take a look at Men’s Wearhouse (MW), which is set to release numbers on Wednesday after the market close. This is a specialty retailer of men’s suits and a provider of tuxedo rental product in the U.S. and Canada. Wall Street analysts, on average, expect Men’s Wearhouse to report revenue of $643.63 million on earnings of $1.04 per share.

    I like this name for an earnings short-squeeze play because two other operators in the same space recently reported strong earnings that sent their stock prices higher. Both PVH (PVH) and Jos. A. Bank Clothiers (JOSB) posted strong earnings last Wednesday, sending PVH up over 3% and JOSB up as much as 12%. This sets up Men’s Wearhouse for a strong quarter if it is able to execute on this competitive environment for menswear.

    The current short interest as a percentage of the float for Men’s Wearhouse is worth mentioning at 7%. That means that out of the 48.43 million shares in the tradable float, 3.39 million are sold short by the bears.

    From a technical standpoint, the stock is currently trading below its 50-day and 200-day moving averages, which is bearish. Since this stock printed a 52-week high in early July at $36.44 a share, it has dropped sharply to a recent low of $24.63 a share. Since hitting that low in August, it rebounded to $30.45 and now trades at just over $27 a share. Shares of MW have been making higher lows and higher highs for most of the month of August, which is bullish.

    The way I would pay this stock is to buy it after they report if it trades above its 50-day moving average of $28.64 a share on strong volume. Look for volume the following day that’s tracking in close to or greater than its three-month average volume of 896,000 shares. I would add to any long position once the stock then trades above its 200-day moving average of $30.78 a share. Look to target a run back towards $33 or possibly higher if the bulls gain control of this stock post-earnings.

    I would only short this name it if drops below $26 a share after they report on heavy volume. I would add to any short position if it then takes out $24 a share and target a drop back towards $22 to $20 a share if the bears pound this name lower post-earnings.

    Men's Wearhouse was also featured in "5 Stocks to Buy Ahead of Earnings."

    Titan Machinery

    One more earnings short-squeeze play is Titan Machinery (TITN), which is set to release numbers on Thursday before the market open. This company owns and operates a network of agricultural and construction equipment stores in the U.S. Titan is a retail dealer of Case IH agriculture equipment and a retail dealer of New Holland Agriculture, Case Construction and New Holland Construction equipment in the U.S. Wall Street analysts, on average, expect Titan Machinery to report revenue of $293.04 million on earnings of 26 cents per share.

    The last time this company reported earnings in early June, it posted strong first-quarter results and raised its forward guidance, sending the stock up over 8% the following day. If we see that again this quarter, then I expect this stock to take off again as the bears scramble to cover some of their short bets.

    The current short interest as a percentage of the float for Titan Machinery is 7%, which means that out of the 14.48 million shares in the tradable float, 1.17 million are sold short by the bears. This isn’t a huge short interest, but since the float here is so low, it’s big enough to spark a sizable short-covering rally on any good news.

    From a technical standpoint, the stock is currently trading right under both its 50-day and 200-day moving averages, which is neutral trendwise. This stock has been making higher lows and higher highs since August, which is bullish. That said, the stock struggled just a few weeks ago to clear some big overhead resistance at around $27.50 a share.

    I would look to be a buyer of this stock after its report if it breaks out above that past overhead resistance of $27.50 a share on strong volume. Look for volume on Thursday’s trading session that’s tracking in close to or greater than its three-month average action of 418,700 shares. I would target a run back towards $30 to $32 a share if the bulls gain full control of this stock post-earnings.

    I would only short this name if it drops below $24 a share on big volume after the company reports its results. I would add to any bearish bets if it then drops below $21 a share and target a drop back towards $20 if the bears want to pound this lower post-earnings.

    To see more potential earnings short squeeze candidates, 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.