Stock Quotes in this Article: ATU, CMTL, JBL, SNX, ZZ

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 to 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 an earnings event sparks a big short-covering rally.

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    This is 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.

    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. This 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 you will miss a lot of the move. That’s why it’s only 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.

     

    Comtech Telecomm

    My first earnings short-squeeze candidate is Comtech Telecomm (CMTL), which is set to report its results on Tuesday after the market close. This company designs, develops and markets products, systems and services for communications solutions. Wall Street analysts, on average, expect Comtech to report revenue of $141.53 billion on earnings of 37 cents per share.

    Comtech has beaten Wall Street estimates for the last two quarters and is coming off a quarter in which it beat estimates by 8 cents, reporting net income of 47 cents vs. estimates of 39 cents. If Comtech can manage to beat for this quarter and do so by another wide margin, then this stock could easily see a large short squeeze.

    The current short interest as a percentage of the float for Comtech sits at around 7.7%. That means that out of the 25.42 million shares in the tradable float, 1.96 million are sold short by the bears. The bears have also been increasing their bets from the last reporting period by 8.3%, or about 150,600 shares.

    From a technical standpoint, this stock is just starting to move above both its 50-day and 200-day moving average, which is bullish. The stock has also been printing higher lows and higher highs since the stock bottomed in mid-August at $24.04 a share, which is also bullish.

    I would look to buy this stock after they report their earnings if the stock can manage to trigger a breakout above $28.50 to $29 share on solid volume. Look for volume that’s tracking in close to or above its three-month average action of 341,200 shares. I would target a run back toward $31 to $32 a share or possibly higher if the bulls manage to spark a short squeeze.

    I would only get short this stock after earnings if it drops below $25.60 on heavy volume. Target a drop back towards $24 to $23.30 a share or possibly even lower if the bears knock this down post-earnings. If the stock losses $23.30 after earnings then it could really drop big since the next nearest support level doesn’t come into play until around $19.50 a share.

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    Jabil Circuit

    Another stock with the potential to see an earnings short squeeze is Jabil Circuit (JBL), which is set to release results on Tuesday after the market close. This company, together with its subsidiaries, provides electronic manufacturing services and solutions in the Americas, Europe, and Asia. Wall Street analysts, on average, expect Jabil Circuit to report revenue of $4.19 billion on earnings of 56 cents per share.

    This company missed Wall Street estimates last quarter after beating projections in the prior two quarters. Jabil Circuit has racked up double-digit year-over-year percentage revenue growth for the past four quarters. During that timeframe, the company has averaged growth of 30.8%.

    The current short interest as a percentage of the float for Jabil stands at 5.2%. That means that out of the 194.46 million shares in the tradable float, 10 million are sold short by the bears. The bears have also been increasing their bets from the last reporting period by 3.9%, or by about 373,600 shares. This is more than enough shorts in the stock to spark a solid short-covering rally if Jabil reports solid numbers and issues bullish guidance.

    From a technical standpoint, this stock is currently trading below both its 50-day and 200-day moving averages, which is bearish. This stock formed a triple top between May through July at around $21.50 a share. Since marking that top, the stock slide all the way down to a recent low of $13.92 a share, but has since rebounded to just over $16 a share. During the recent rally off the lows, JBL has been making higher highs and higher lows. This shows at least for the near-term a bullish trend change.

    I would be a buyer of this stock after it releases results once it trades back above some near-term overhead resistance at $17.76 a share on solid volume. Look for volume that’s tracking in close to or above its three-month average action of 4.2 million shares. I would then add to any long position once the stock takes out its 200-day moving average of $19.28 with volume. I would target a run towards its 52-week high of $23.09 a share if the bulls gain full control of this stock post-earnings.

    I would short this stock after its report only if it drops below $15 a share on heavy volume. I would then add heavily to any short position if JBL takes out $13.92 to $13.50 with volume. Target a drop back towards $12 to $11.50 if the bears whack this name lower post-earnings.

    Jabil, one of the top holdings of Leon Cooperman's Omega Advisors, was also featured in "5 Earnings Stocks for Selective Traders."

    Actuant

    One earnings short-squeeze play in the industrial goods sector is Actuant (ATU), which is set to release numbers on Wednesday before the market open. This company manufactures industrial products and systems worldwide. Wall Street analysts, on average, expect Actuant to report revenue of $394.85 million on earnings of 46 cents per share.

    This company beat Wall Street estimates last quarter after reporting earnings that were in line with estimates in the prior quarter. Revenue has been trending up for the past three quarters, by 17.4% in the third quarter, 12.4% in the second quarter and 4.3% in the first quarter.

    The current short interest as a percentage of the float for Actuant is a rather large 13%. That means that out of the 63.15 million shares in the tradable float, 8.18 million are sold short by the bears.

    From a technical standpoint, this stock is currently trading below both its 50-day and 200-day moving averages, which is bearish. This stock has been beaten down big since hitting its July high if $27.65 a share since its currently trading at just over $18 a share. That said, the stock has started to form a sideways basing pattern between $17.50 and $20.50 a share. If the lows of this basing pattern hold, then we could be seeing a near-term bottom for this stock.

    If you want to buy this stock for an earnings short-squeeze, I would wait until after its report and buy the stock if $17.50 holds as support. As long as that level holds, I would jump into this name off of any strength. I would then add to any long position once this stock breaks out above its 50-day of $20.84 on strong volume. Look for volume that’s tracking in close to or above its three-month average action of 967,000 shares. I would target a run back towards its 200-day of $25.37 if the bulls push this higher post-earnings.

    I would short this name after its report only if it drops below that near-term support zone at $17.50 a share on big volume. Any high volume move below that level should set this stock up to trade down to $15 t o$14 a share or possibly even lower if the bears knock this down post-earnings.

    Sealy

    One earnings short-squeeze trade in the consumer cyclical sector is Sealy (ZZ), which is set to release numbers on Tuesday after the market close. This company, together with its subsidiaries, manufactures and markets various bedding products. Its products include mattresses and mattress foundations. Wall Street analysts, on average, expect Sealy to report revenue of $342.11 million on earnings of 4 cents per share.

    This stock has been beaten down big in front of the quarter, since the stock has dropped from its May highs near $3 a share trading to its current price of just under $1.60 a share. This large drop has created an oversold condition that could provide for a sharp pop in the stock if Sealy can beat numbers and issue bullish guidance.

    The current short interest as a percentage of the float for Sealy is an extremely large at 30%. That means that out of the 32.83 million shares in the tradable float, 14.91 million are sold short by the bears. This isn’t a giant short interest, so if you see any strength in this stock post-earnings, then be prepared to play it from the long side.

    From a technical standpoint, the stock is currently trading well below both its 50-day and 200-day moving averages, which is bearish. In fact, this stock has been displaying bearish trends for almost the entire year, with shares printing lower highs and lower lows a majority of the time. That said, the stock might finally be starting to find some buying support at around $1.55 to $1.60 a share.

    If you’re bullish on this stock, I would be a buyer after it reports earnings if the stock can trade above $1.70 a share on strong volume. Look for volume that’s tracking in close to or above its three-month average action 331,800 shares. I would add to any long position once the stock then takes out its 50-day moving average of $1.91 a share. I would target a run back toward $2 to $2.15 a share if the bulls gain full control of this stock post-earnings.

    Synnex

    One final earnings short-squeeze play is Synnex (SNX), which is set to release numbers on Tuesday after the market close. This is a business process services company, servicing resellers, retailers and original equipment manufacturers, in multiple regions globally. Wall Street analysts, on average, expect Synnex to report revenue of $2.57 billion on earnings of 89 cents per share.

    This company is on tap to beat Wall Street estimates for the fifth consecutive quarter if it can manage to report another solid one. Synnex’s profits have risen year-over-year by an average of 17.5% over the past five quarters. Revenue has trended higher for the past three straight quarters.

    The current short interest as a percentage of the float for Synnex is a notable 6.9%. That means that out of the 31.43 million shares in the tradable float, 1.72 million are sold short by the bears. It’s worth noting that the bears have also increased their bets from the last reporting period by 13.6%, or about 205,000 shares.

    From a technical standpoint, the stock is currently trading below both its 50-day and 200-day moving averages, which is bearish. This stock dropped sharply from its May high of $34.48 to a recent low of $22.56 a share. That said, the stock has started to form a sideways basing pattern between $23 and $26.70 a share. This shows the downtrend could be over for now if the bottom of the basing pattern holds as support.

    I would look to be a buyer of this stock after it releases its results if the stock can break out above $26.70 a share on big volume. Look for volume that’s tracking in close to or greater than its three-month average action of 232,400 shares. I would target a run back toward its 200-day moving average of $31.07 a share or possibly higher if the bulls spark a solid short-squeeze.

    I would short this name after earnings only if the stock drops below $22.56 a share on heavy volume. I would target a drop back towards $20 to $17 shares if the bears push this name lower post-earnings.

    To see more potential earnings short squeeze candidates, including Darden Restaurants (DRI), Neogen (NEOG) and Omnova Solutions (OMN), 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.