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5 Heavily Shorted Stocks That Could Pop on Earnings - 16350 views
WINDERMERE, Fla. (Stockpickr) -- News events have the power to create big volatility in stocks, and the 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 manage your risk accordingly. Sometimes the best play is to wait for the stock to breakout 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.
That said, sometimes the stock is going to be in such high demand that 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.
My first earnings short squeeze candidate is Photronics (PLAB), which is set to report its results on Tuesday after the market close. Phototronics is a manufacturers of photomasks, which are precision photographic quartz plates containing microscopic images of electronic circuits. Wall Street analysts, on average, expect Photronics to report revenue of $131.78 million on earnings of 19 cent per share.
This stock has been absolutely hammered going into earnings, with shares dropping from a recent high of $10.13 a share to its current price of around $5.70 a share. This big drop has created a potentially oversold condition from which the stock could bounce sharply if the bulls hear what they want.
The current short interest as a percentage of the float for Photronics is a rather high 12.4%. That means that out of the 51.67 million shares in the tradable float, 7.05 million are sold short by the bears.
From a technical standpoint, shares of Photronics are trading below both its 50-day and 200-day moving averages, which is bearish. The stock has recently bounced from a low of $5.24 a share to $6.32 a share. The current reading on the relative strength index is showing an oversold condition at 33. Oversold can always get more oversold, but if the price trend starts to change here for Photronics, then we could see a bounce.
I would only be a buyer of this stock after its report if you see it trade above $6.32 a share on heavy volume. Look for volume that’s greater than or close to its three-month average volume of 929,000 shares. I would look for a run towards its 50-day ($7.76) and 200-day ($7.66) moving averages if the stock clears $6.32 with volume.
I would only short this stock after its report if shares slip below $5.24 on heavy volume. I would target $4.50 to $4 a share if the stock fails to hold above $5.24 after they report earnings.
Qihoo 360 Technology
Another stock with the potential to squeeze the bears off their earnings report is Qihoo 360 Technology (QIHU), which is set to release results on Wednesday after the market close. Qihoo is engaged in the operations of Internet services and sales of third-party anti-virus software in the People's Republic of China. Wall Street analysts, on average, expect Qihoo 360 Technology to report revenue of $29.12 million on earnings of 6 cents per share.
This company offers a mix of Internet services. First, it’s the leading anti-virus firm in China, with 238 million monthly active users, which totals a virus-user penetration rate of 83.9% in the country. The company also sells a Web browser, 360Safe, which is second in total usage at 19% of market share. Qihoo 360 also has a popular Web game portal and a group-buying platform, and it offers cloud-computing services and security products for the iPhone and Android devices.
The current short interest as a percentage of the float for Qihoo 360 is just over 5%. That means that out of the 68.45 million shares in the tradable float, 3.66 million are sold short by the bears.
From a technical standpoint, this stock is trading above its 50-day moving average, which is bullish. The stock has near-term support at around $22 a share and overhead resistance at $23.50 to $24 a share. The stock is also trending below a key descending trend line. Until that trend line is breached to the upside, this stock has a lot of overhead resistance to contend with.
I would only be a buyer of this stock after its report if it breaks above that descending trend line (look for a move above $25) on big volume. Look for volume that’s close to or well above its three-month average action of 963,000 shares. I would add to any long positions if you see this stock trade above $25.75 a share. A move over $25.74 should set up the stock for a run towards $30 a share or possible even higher.
I would only short this name after its report if the stock drops below its 50-day moving average on heavy volume. I would add to any short positions if it then drops below $20 a share and look for a near-term target of $17 to $16 a share of the bears take full control of this stock.
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Heavily shorted Chinese Internet stock Sina (SINA) is set to release numbers on Wednesday after the market close. This company provides online media and mobile value-added services in the People’s Republic of China. Wall Street analysts, on average, expect Sina to report revenue of $114.71 million on earnings of 19 cents per share.
This stock is taking a big hit today, with the shares down around 9%, as traders take their cues from a disappointing earnings result out of another Chinese Internet player E-Commerce China Dangang (DANG). This hit to Sina could be unwarranted if the company can deliver a strong quarter and if management can convince Wall Street that it has a plan to leverage its 140 million users with new social media offerings.
The big story with Sina is its Sina Weibo mircoblog service, which is often compared to Twitter. The company has been investing big in monetizing Weibo with the launch of a virtual cash and e-commerce platform. Those moves could be the key to a strong quarter.
The current short interest as a percentage of the float for Sina is a notable 10.2%. That means that out of the 54.20 million shares in the tradable float, 5.7 million are sold short by the bears.
From a technical standpoint, this stock is currently trading below its 50-day moving average and above its 200-day moving average, which is neutral trendwise. The stock recently found some buying support at $82 a share and run up to a high of $106.99 a share.
If you’re bullish on Sina, I would wait until it reports and would be a bigger buyer of this stock if it trades above $106.99 a share on big volume. Look for volume that’s close to or well above the three-month average action of 8.5 million shares. I would add to any long position if it then moves above $110 and target $125 if it continues to trend higher after earnings.
I would only short this name if you see it drop below the 200-day moving average ($93.65) on big volume following its earnings report. I would add to any shorts if it takes out $90 a share and target $82 to $77 a share if the bears take this stock over after earnings.
If you’re looking for an earnings short-squeeze play in the retail sector, then consider Hot Topic (HOTT), which is set to release numbers on Wednesday after the market close. This company, together with its subsidiaries, operates as a mall- and Web-based specialty retailer in the U.S. The company operates Hot Topic and Torrid store concepts, as well as an e-space music discovery concept, ShockHound. Wall Street analysts, on average, expect Hot Topic to report revenue of $147.63 million on a loss of 8 cents per share.
Hot Topic has met Wall Street expectations for the past four quarters. During the last quarter, the firm reported zero cents per share, which met the median Wall Street forecast. Revenue during those past four quarters have been trending down, by 0.8% to 4.9%.
The current short interest as a percentage of the float for Hot Topic is a reasonably large 9.7%. That means that out of the 40.74 million shares in the tradable float, 4.27 million are sold short by the bears.
From a technical standpoint, the stock is currently trading below its 50-day moving average and above its 200-day moving average, which is neutral trendwise. Shares of Hot Topic just found some buying support right around its 200-day moving average ($6.34) and it has run into resistance near its 50-day ($7.35).
The way I would pay this stock would be to buy it after its report if it trades above its 50-day moving average on big volume. Look for volume that’s close to or greater than 656,000 shares. I would add to any long position once this stock breaks out above $8.37 to $8.42 share.
I would only short this name if it drops below its 200-day moving average after its report on big volume. I would target $5 a share of the bears take over control of this stock.
Hot Topic is one of the highest-yielding retail stocks.
One more earnings short-squeeze play is Canadian Solar (CSIQ), which is set to release numbers on Wednesday before the market open. This company designs, develops, manufactures and sells solar cell and module products that convert sunlight into electricity for a variety of uses. The company conducts all of its manufacturing operations in China. Wall Street analysts, on average, expect Canadian Solar to report revenue of $449.76 million on earnings of 28 cents per share.
This company beat Wall Street estimates last quarter after missing estimates the prior quarter. Revenue has been trending up for the past three straight quarters, as seen by 31.6% rise in the first quarter of this year, 78.1% jump in the fourth quarter of last year and 77% rise in the third quarter of last year.
This stock has been beaten down big in the last few months, with shares dropping from a recent high in July of $12 a share to its current price of just above $7.75 a share. This stock could easily see some robust short covering from these beaten-down levels if they report a solid quarter and guide higher.
The current short interest as a percentage of the float for Canadian Solar is an extremely large 16.8%. That means that out of the 29.69 million shares in the tradable float, 5.01 million are sold short by the bears.
From a technical standpoint, the stock is currently trading below both its 50-day and 200-day moving averages, which is bearish. The stock has also been making lower lows and lower highs for the past two months, which is another bearish trend. That said, the stock just found some buying support at $6.33 and has run into resistance at around $8 a share.
I would only be a buyer of this stock after its report if it trades above $8 on strong volume. Look for volume that’s close to or greater than its three-month average action of 915,000 shares. I would add aggressively to any long position if CSIQ takes out its 50-day moving average of $9.46 a share on solid volume.
I would only short this name if it drops below $6.33 a share on big volume after the company reports. A drop below that level could mean that a test of $4 to $3 a share is in the cards, since $6.33 is a big near-term support level.
-- Written by Roberto Pedone in Winderemere, Fla.
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.