Stock Quotes in this Article: COOL PCYC CBRL BBY LRN

WINDERMERE, Fla. (Stockpickr) -- With earnings season in full swing on Wall Street, it’s the perfect opportunity for market-players to create a powerful watch list of stocks that are due to report numbers and are also heavily shorted by the bears.

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.

    Majesco Entertainment

    My first earnings short-squeeze candidate is Majesco Entertainment (COOL), which is set to report its results on Tuesday after the market close. This company provides interactive entertainment products primarily in the U.S. and Europe. Wall Street analysts, on average, expect Majesco to report revenue of $17.50 million on a loss of 2 cents per share.

    This is my favorite short-squeeze candidate today because this company is in a hot space, and the stock is well off its recent highs in front of the quarter. Much of Majesco’s recent success is due to its popular video game Zumba Fitness, a fitness and dance game that’s popular among young adults. If sales come in strong and Majesco issues bullish guidance for this quarter, then the chances for a solid short squeeze are strong.

    The current short interest as a percentage of the float for Majesco stands at 4.9%. That means that out of the 34 million shares in the tradable float, 1.76 million are sold short by the bears. This isn’t a huge short interest, but it’s big enough and the float is small enough to spark a large short-covering rally if the bulls get the news they are looking for.

    From a technical standpoint, this stock is currently trading above both its 50-day and 200-day moving average, which is bullish. That said, the stock is well off its June high of $4.53 a share with shares trading at around $2.70 a share.

    If you’re bullish on this name, I would buy this stock after earnings once it trades above $2.75 to $2.81 on big volume. Look for volume that’s tracking in close to or above its three-month average action of 1.7 million shares. I would then add to any long position if you then see COOL trade above $3.57 a share with volume. Target a run back towards its 52-week high of $4.53 a share if the bulls pressure the bears to cover some of their bets.

    Majesco shows up on a recent list of theBest-Performing Stocks Under $5 in 2011.

    Pharmacyclics

    Another potential earnings short-squeeze play is Pharmacyclics (PCYC), which is set to report results on Monday after the market close. This clinical-stage biopharmaceutical company is focused on developing and commercializing small-molecule drugs for the treatment of cancer and immune mediated diseases. Wall Street analysts, on average, expect Pharmacyclics to report revenue of $2.67 million on a loss of 14 cents per share.

    It’s worth watching Pharmacyclics for an earnings short-squeeze trade since the stock has been trending strong heading into the quarter with shares up over 83% so far in 2011. Since the stock is currently trading at just over $11 a share it’s only about 2 points off of its 52-week high of $13.09 a share. This sets the stock up for a major breakout if the bulls gain full control of this name post-earnings.

    The current short interest as a percentage of the float for Pharmacyclics is 8.2%, which means that out of the 39 million shares in the tradable float, 3.61 million are sold short by the bears.

    From a technical standpoint, this stock is trading right at its 50-day moving average and above its 200-day moving average, which is bullish. This stock has been in a strong uptrend since late April where shares have been making higher highs and higher lows for most of the time. That said, the stock did hit some overhead resistance in the past three months at $13 to $12 a share.

    If you’re bullish on this name, I would wait until after they report and buy the stock if it breaks out above $12 to $13.09 a share on huge volume. Look for volume on Tuesday that’s tracking in close to or above its three-month average action of 798,900 shares. If it takes out the 50-day to the upside, then I would target a run back towards $52 to $53 a share or possibly higher. A breakout move in PCYC with volume should spark a big spike higher in this stock post-earnings as the short-sellers rush to buy back the stock.

    I would only short this stock after earnings if it drops below $10.74 a share on strong volume. I would add to any short position if it then trades below $10 to $9.50 a share with volume. I would target a drop back towards its next significant past support at $9.50 a share if the bears gain full control of this stock post-earnings.

    Cracker Barrel Old Country Store

    An earnings short-squeeze play in the casual dining sector is Cracker Barrel Old Country Store (CBRL), which is set to release numbers on Tuesday before the market open. This company is principally engaged in the operation and development of the Cracker Barrel Old Country Store restaurant and retail concept. Wall Street analysts, on average, expect Cracker Barrel to report revenue of $623.47 million on earnings of 96 cents per share.

    Cracker Barrel missed Wall Street estimates last quarter, but some major changes have taken place at the company since then. For example, veteran value investor Sardar Biglari reported a 9% stake in the company earlier this summer, and they also appointed a new CEO in early August. Biglari is famous for hostile takeovers and he has had a lot of success in turning around restaurant chains. That said, since taking his stake earlier this summer, the stock has been absolutely hammered by the bears, dropping from its July high of $49.90 a share to a recent low of $37.31 a share.

    The current short interest as a percentage of the float for Cracker Barrel is a notable 9.3%. That means that out of the 19.6 million shares in the tradable float, 2.07 million are sold short by the bears. The bears have also been increasing their bets from the last reporting period by 3.6%, or by about 71,300 shares.

    From a technical standpoint, this stock is currently trading significantly below its 50-day and 200-day moving averages, which is bearish. The stock formed a double top chart pattern back in July at around $49 a share, and since then it has dropped into a sideways trading pattern between $42 and $38 a share.

    The way I would play this stock is to wait until after they report and buy the stock if it holds above its 52-week low of $37.31 a share. If it holds that level and you get long, I would then add to any position once it trades above $41 a share on strong volume. Look for volume that’s tracking in close or above its three-month average action of 306,300 shares. I would target a run back towards it s 50-day moving average of $43.64 a share or possibly higher if the bulls gain control of this stock post-earnings.

    I would only short this name after its report if you see it drop below $37.31 a share on big volume. A move below that level should set the stock up for a test of some past support at $35 to $34 a share or possibly even lower if the bears knock this down post-earnings.

    Cracker Barrel, one of the highest-yielding leisure stocks, was also featured in "5 Earnings Trades for a Highly Correlated Market."

    Best Buy

    One earnings short-squeeze play in the technology retail complex is Best Buy (BBY), which is set to release numbers on Tuesday before the market open. Best Buy is a multinational retailer of consumer electronics, home office products, entertainment products, appliances and related services. Wall Street analysts, on average, expect Best Buy to report revenue of $11.52 billion on earnings of 53 cents per share.

    Best Buy is looking to beat Wall Street estimates for the third quarter in a row. During the last quarter, the company beat estimates after reporting earnings of 35 cents per share vs. the mean estimate of 33 cents per share. That said, Best Buy has also seen its net income drop in each of the past three quarters.

    The current short interest as a percentage of the float for Best Buy is high at 12.5%. That means that out of the 301 million shares in the tradable float, 37.54 million are sold short by the bears. This is far from a small float, but with over 12% of the float short, a decent short squeeze could kickoff on any bullish earnings news.

    From a technical standpoint, this stock is currently trading below both its 50-day and 200-day moving averages, which is bearish. Back in July, the stock formed a double top chart pattern at $32.60 a share and since then it has hit a low of $23 a share. For the last two months, the stock has been trading in a sideways pattern between $26 and $23 a share.

    The way I would play this name is to wait until after they report and buy the stock if it trades above $26 a share and above its 50-day moving average of $26.92 a share on strong volume. Look for volume that’s tracking in close to or above its three-month average volume of 7.5 million shares. If BBY takes out its 50-day following earnings, then it’s possible for the stock to trade up towards $30 to $31 a share if bears cover some of their short bets.

    I would look to get aggressively short this stock after earnings if you see shares take out some major near-term support at $23 a share on heavy volume. That $23 level is important because the stock hasn’t traded below that price since 2008. A drop below $23 could setup a situation where the bears pound this name back towards its next significant support zone at $19 or possible even lower.

    Best Buy is one of Jim Cramer's Stocks to Watch this week.

    K12

    One more earnings short-squeeze play is K12 (LRN), which is set to release numbers on Wednesday before the market open. This technology-based education company offers curriculum and educational services designed to facilitate individualized learning for students in kindergarten through 12th grade. Wall Street analysts, on average, expect K12 to report revenue of $123.11 million on a loss of 1 cent per share.

    This stock has been beaten down big in front of the quarter with shares dropping from its July highs of $35 a share to its current price of just over $25 a share. The stock was even as high as $39 in May, so as you can see here K12 has been a wining trade for the short-sellers of late. That said, on last Thursday an analyst at Wunderlich started coverage on this company with a buy rating and a price target of a $35. A decent earnings result could easily spark a solid short-covering rally for K12.

    The current short interest as a percentage of the float for K12 is a rather large 12.1%. That means that out of the 26 million shares in the tradable float, 3.12 million are sold short by the bears. This is a situation with a very low float and high short interest. Stocks with these characteristics can often see big short-squeezes if bullish news develops.

    From a technical standpoint, this stock is currently trading below both its 50-day and 200-day moving averages, which is bearish. The stock formed a double-top chart pattern in July after it failed to trade above $35 a share. That said, shares have also recently formed a near-term double bottom at around $25 to $23.30 a share.

    The way I would play this name is to buy some shares after they release their results if the near-term support zone at $24.80 holds on the stock. If that level holds, then I would add to any long position once it takes out $28.35 and its 50-day moving average at $29.57 a share. Look for a strong volume move above those two levels that’s tracking in close to or greater than its three-month average volume of 163,300 shares. I would target a run back towards its 200-day moving average of $31.49 a share or possibly even higher.

    I would only get short this name if it trades below $23 a share on strong volume after they report earnings. I would add to any short if it then takes out $21 a share and target a move back towards $18.

    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.