Stock Quotes in this Article: ACAT, JCP, LWAY, OPNT, GRPN

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 – buy 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.

    With that in mind, here’s a look at several stocks that could experience big short squeezes when they report earnings this week.

    J.C. Penney

    My first earnings short-squeeze trade idea is department and discount store player J.C. Penney (JCP), which is set to release its numbers on Tuesday before the market open. This company’s business consists of selling merchandise and services to consumers through its department stores and through its Internet Web site at jcp.com. Wall Street analysts, on average, expect J.C. Penney to report revenue of $3.48 billion on a loss of 10 cents per share.

    This company missed Wall Street estimates last quarter after beating estimates in the prior two quarters. J.C. Penney is looking snap a streak of three straight quarters of revenue declines. Revenue dropped 0.8% in the second quarter of the last fiscal year and 4.8% in the third quarter of the last fiscal year.

    The current short interest as a percentage of the float for J.C. Penney is pretty high at 17.1%. That means that out of the 162.03 million shares in the tradable float, 33.30 million shares are sold short by the bears.

    From a technical perspective, JCP is currently trading above its 200-day moving average and below its 50-day moving average, which is neutral trendwise. This stock sold off hard from its February high of $42.94 to its recent low of $32.45 a share. During the last month and change, shares of JCP have found buying interest around $33 to $32.50 a share.

    If you’re bullish on JCP, I would wait until after they report and look for long-biased trades if this stock can manage to move back above its 50-day moving average of $35.42 share with high volume. Look for volume on that move that registers near or above its three-month average action of 4,785,470 shares. If we get that action, then I would add to any JCP long positions once it takes out some near-term overheard resistance at $36.83 to $37.25 a share with high volume.

    I would simply avoid JCP or look for short-biased trades if after earnings this stock fails to trade back above its 50-day moving average at $35.42, and then drops back below some near-term support at $32.45 a share with heavy volume. Target a move lower toward $30 to $29 a share if the bears hammer this stock down post-earnings.

    Groupon

    Another potential earnings short-squeeze trade is Groupon (GRPN), which is set to report results on Monday after the market close. This company is a local e-commerce marketplace that connects merchants to consumers by offering goods and services at a discount. Wall Street analysts, on average, expect Groupon to report revenue of $530.58 million on earnings of 1 cent per share.

    If you’re looking for a beaten-down heavily-shorted stock ahead of its earnings report, then make sure to take a strong look at shares of Groupon. This stock has been destroyed by the bears during the last six months with shares dropping over 45%. Shares of Groupon are bouncing sharply today in front of its earnings report with the stock up 10% to $10.90, but that move is just a point off its 52-week low of $9.63 a share.

    The current short interest as a percentage of the float for Groupon is high at 8.3%. That means that out of the 227.25 million shares in the tradable float, 17.43 million shares are sold short by the bears.

    From a technical perspective, GRPN is currently trading below its 50-day moving average, which is bearish. This stock has been stuck in a nasty downtrend since February, with shares dropping from $25.84 to a low of $9.63 a share. For almost the last two months, this stock has been trending in oversold territory since its relative strength index reading for that period has been under 30. This oversold reading could be setting up GRPN for a sharp move higher post-earnings.

    If you’re bullish on GRPN, I would wait until after they release earnings and target long-biased trades if this stock can manage to break out above some near-term oversold resistance at $12.23 a share with high-volume. Look for volume on that move that’s close to or well above its three-month average volume of 2,449,950 shares. If we get that move, look for GRPN to easily tag its 50-day moving average of $14.22 a share or possibly trade much higher.

    I would simply avoid GRPN or look for short-biased trades if after earnings that breakout fails to hit, and then the stock takes out its 52-week low of $9.63 with high-volume. If we get that move, then target a drop of 15% or more if the bears continue to pound this stock lower post-earnings.

    OPNET Technologies

    One potential earnings short-squeeze play in the software and programming complex is OPNET Technologies (OPNT), which is set to release numbers on Monday after the market close. This company is a provider of application and network performance management solutions. Wall Street analysts, on average, expect OPNET Technologies to report revenue of $44.79 million on earnings of 21 cents per share.

    OPNET is another severely beaten-down heavily-shorted stock. So far in 2012, it has been destroyed by the sellers with shares falling over 35%. Traders should now keep an eye on this stock for a potential of short-squeeze and rebound trade off these oversold conditions post-earnings.

    The current short interest as a percentage of the float for OPNET Technologies is notable at 8.3%. That means that out of the 14.92 million shares in the tradable float, 1.23 million shares are sold short by the bears.

    From a technical perspective, OPNT is currently trading below both its 50-day and 200-day moving averages, which is bearish. This stock has dropped hard from its February high of $38.47 to a recent low of $22.10 a share.

    Since that big-time selloff, OPNT has now started to trend sideways between $24 and $22 a share. A move outside of that sideways trading pattern post-earnings should set this stock up for its next big trend.

    If you’re a bull on OPNT, then I would wait until after they report and look for long-biased trades if this stock can break out above $24 a share with high-volume. Look for volume on that move that registers close to or above its three-month average action of 238,573 shares. If we get that action, then I would add to any long positions in OPNT if it takes out its 50-day moving average of $26.16 a share with volume.

    I would avoid OPNT or look for short-biased trades if the stock fails to trigger that move, and then drops below that major near-term support at $22 a share with high-volume. Target a move toward its next significant support zone at $17.50 a share if the bears gain full control of this stock post-earnings.

    Lifeway Foods

    One earnings short-squeeze candidate is Lifeway Foods (LWAY), which is set to release numbers on Tuesday after the market close. This company is engaged in the manufacturing of probiotic, cultured, functional dairy and non-dairy health food products. Wall Street analysts, on average, expect Lifeway Foods to report revenue of $20.84 million on earnings of 6 cents per share.

    The current short interest as a percentage of the float for Lifeway Foods is very high at 14.9%. That means that out of the 4.63 million shares in the tradable float, 686,000 are sold short by the bears. This is a decent short-interest on a stock with an extremely low float. If LWAY can manage to report a solid quarter and raise forward guidance, then this stock could see a power short-squeeze since the float is so small.

    From a technical perspective, LWAY is currently trading below both its 50-day and 200-day moving averages, which is bearish. This stock has been trending lower for the past six months, with shares dropping from $11.24 to a recent low of $8.03 a share.

    During that downtrend, shares of LWAY have consistently made lower highs and lower lows, which is bearish price action. Traders will need to look for a change in that trend post-earnings in order for LWAY to spike higher.

    If you’re bullish on LWAY, I would look for long-biased trades after they report if this stock manages to move back above its 50-day moving average of $8.81 a share with high-volume. Look for volume on that move that registers near or well above its three-month average action of 10,403 shares. If we get that action, then the trend could change to bullish for LWAY, and the stock could spike back toward its 200-day moving average of $9.68 a share.

    I would simply avoid LWAY or look for short-biased trades if the stock fails to trigger that move, and then drops back below some near-term support at $8.03 a share with high-volume. Target a 15% or more fall in shares of LWAY if that $8.03 support zone gets taken out with volume post-earnings.

    Arctic Cat

    My final earnings short-squeeze idea is semiconductor player Arctic Cat (ACAT), which is set to release numbers on Tuesday before the market open. This company designs, engineers, manufactures and markets snowmobiles and all-terrain vehicles under the Arctic Cat brand name, as well as related parts, garments and accessories. Wall Street analysts, on average, expect Arctic Cat to report revenue of $92.71 million on a loss of 56 cents per share.

    Recently, KeyBanc said Arctic Cat dealer checks were encouraging, regarding the recent sell-through of the Wildcat, and the ATV category appears to have reached an inflection point. The firm said valuation on the stock is compelling and it reiterated its buy rating and $60 price target.

    The current short interest as a percentage of the float for Arctic Cat stands at 8.6%. That means that out of the 12.23 million shares in the tradable float, 1.06 million are sold short by the bears. This stock has a decent short-interest and an extremely low float. The bears have also been increasing their bets from the last reporting period by 26.3%, or by about 220,000 shares. If the bears are caught leaning too hard into this quarter, then this stock could experience a monster short-squeeze.

    From a technical perspective, ACAT is currently trading right below its 50-day moving average and above its 200-day moving aveage, which is neutral trendwise. This stock has been in a monster uptrend for the past six months with shares rising a whopping 80%. During that move, shares of ACAT have soared from $18.50 to a recent high of $47.46 a share. After tagging that high, this stock has sold off back below its 50-day moving average of $42.51 a share.

    If you’re bullish on ACAT, I would wait until after they report and look for long-biased trades if this stock manages to move back above its 50-day moving average of $42.51 a share with high-volume. Look for volume on that move that’s near or well above its three-month average action of 232,416 shares. If we get that move, then I would add to any ACAT long positions if the stock triggers an even bigger breakout above $45 to $47.60 a share with high-volume.

    I would simply avoid ACAT or look for short-biased trades if it fails to recapture its 50-day moving average, and then drops below some major near-term support levels at $40.64 to $39 a share with high-volume. If we get that action, then I would target a drop back toward $35 to $30 a share if the bears whack this stock down post-earnings.

    To see more potential earnings short squeeze plays, check out the Earnings Short Squeeze Plays portfolio on Stockpickr.

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    -- 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.