Stock Quotes in this Article: ABMD, ALKS, PLCE, SPLS, ZUMZ

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.

>>5 Rocket Stocks to Buy This Week

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 -- but 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.

Zumiez

My first earnings short-squeeze play today is specialty retailer Zumiez (ZUMZ), which is set to release its numbers on Thursday after the market close. This is a specialty retailer of action sports related apparel, footwear, equipment and accessories operating under the Zumiez brand name. Wall Street analysts, on average, expect Zumiez to report revenue of $128.51 million on earnings of 11 cents per share.

During the last quarter, Zumiez beat Wall Street estimates by one cent, reporting net income of 60 cents per share versus estimates of 59 cents per share. That marked the fourth straight quarter of topping earnings estimates. This company has registered double digit year-over-year percentage revenue growth for the past four quarters. Over that timeframe, the company has averaged growth of 16.2%.

The current short interest as a percentage of the float for Zumiez is pretty high at 14.7%. That means that out of the 22.21 million shares in the tradable float, 3.27 million shares are sold short by the bears.

>>5 Stocks That Make for Healthy Investments

From a technical perspective, ZUMZ is currently trading above both its 50-day and 200-day moving averages, which is bullish. This stock has been in a prefect uptrend for the last six months, with shares ripping higher from $20.91 to a recent high of $38.99 a share. During that move, ZUMZ has consistently made higher lows and higher highs, which is bullish price action.

If you’re in the bull camp on ZUMZ, I would wait until after its report and look for long-biased trades if this stock triggers a break out above some near-term overhead resistance at $39 a share with high volume. Look for volume on that move that registers near or above its three-month average action of 413,547 shares. If we get that action, look for ZUMZ to hit $45 or higher post-earnings.

I would simply avoid ZUMZ or look for short-biased trades if after earnings this stock fails to trigger that move, and then drops back below its 50-day moving average of $35.60 a share with heavy volume. Target a move back towards some previous support at $32 to $30 a share or possibly much lower if the bears spark a big selloff post-earnings.

Alkermes

Another potential earnings short-squeeze candidate is biotechnology and drugs player Alkermes (ALKS), which is set to report results on Monday after the market close. This company is engaged in the business of developing, manufacturing and commercializing medicines for the treatment of prevalent, chronic diseases. Wall Street analysts, on average, expect Alkermes to report revenue of $125.88 million on a loss of 16 cents per share.

The current short interest as a percentage of the float for Alkermes stands at 5.7%. That means that out of the 121.23 million shares in the tradable float, 6.95 million shares are sold short by the bears. This isn’t a huge short-interest, but it’s more than enough to spark a sizeable move post-earnings if the company can manage to report a solid quarter and raise forward guidance.

From a technical perspective, ALKS is currently trading above both its 50-day and 200-day moving averages, which is bullish. This stock has been trading sideways for the past two months, between $17 and $18.84 a share. A move outside of that range post-earnings should setup this stock for its next big trend.

If you’re bullish on ALKS, I would wait until after it releases earnings and target long-biased trades if this stock can manage to break out above some near-term oversold resistance at $18.84 a share with high-volume. Look for volume on that move that’s close to or well above its three-month average action of 1,142,350 shares. If we get that move, I would then add to any long positions once ALKS takes out some more overhead resistance at $19.87 to $20 a share.

I would simply avoid ALKS or look for short-biased trades if after earnings this stock fails to trigger that breakout, and then takes out its 200-day moving average of $16.77 a share with high-volume. If we get that move, then target a drop back below some previous support at $16 if the bears gain full control of this stock post-earnings.

I also featured Alkermes recently in "5 Stocks Insiders Love Right Now."

Staples

One potential earnings short-squeeze trade in the office supplies sector is Staples (SPLS), which is set to release numbers on Wednesday before the market open. This company, together with its subsidiaries, operates as an office products company. Wall Street analysts, on average, expect Staples to report revenue of $6.19 billion on earnings of 30 cents per share.

This company met Wall Street estimates last quarter after beating estimates in the prior two quarters. This company is looking to continue its trend of three-straight revenue increases moving into this quarter. Revenue jumped 5.2% in the second quarter of the last fiscal year and 0.5% in the third quarter of the last fiscal year.

The current short interest as a percentage of the float for Staples is worth mentioning at 6.6%. That means that out of the 688.81 million shares in the tradable float, 45.44 million shares are sold short by the bears. The bears have also been increasing their bets from the last reporting period by 4.1%, or by about 1.79 million shares.

>>7 Stocks Climbing on High Volume

From a technical perspective, SPLS is currently trading above its 200-day moving average and below its 50-day moving average, which is neutral trendwise. This stock has been downtrending since its March high of $16.90 to a recent low of $14.69 a share. During that downtrend, shares of SPLS have been making lower highs and lower lows, which is bearish technical price action. That said, the stock has just started to move sideways near its 200-day moving average of $14.73, and for now it has stopped its pattern of lower lows.

If you’re a bull on SPLS, then I would wait until after its report and look for long-biased trades if this stock can break out above its 50-day moving average of $15.72 a share with high-volume. Look for volume on that move that hits close to or above its three-month average action of 9,825,260 shares. If we get that action, then I would add to any long positions in SPLS if it takes out some more overhead resistance at $16.90. A high-volume move above $16.90 will be significant because it will put a gap-down in price from 2011 into play that started above $19 a share.

I would avoid SPLS or look for short-biased trades if the stock fails to trigger that move, and then drops below some near-term support at $14.69 to $14.30 a share with high-volume. Target a drop towards its next major support zones at $13 to $12.29 a share if the bears hammer this stock down post-earnings.

Staples shows up on a list of 10 Stocks to Buy in May and Go Away.

Abiomed

One earnings short-squeeze candidate in the medical equipment and supplies complex is Abiomed (ABMD), which is set to release numbers on Wednesday before the market open. This company is a provider of medical devices in circulatory support and offers a continuum of care in heart recovery to acute heart failure patients. Wall Street analysts, on average, expect Abiomed to report revenue of $34.98 million on earnings of 6 cents per share.

On Monday, Wunderlich Securities said it expects another strong quarter for Abiomed following a growing amount of clinical data and strong cost effectiveness data. Wunderlich stated that they are very comfortable that Abiomed will beat its earnings estimate of $33.6 million. They maintained their buy rating on the stock.

The current short interest as a percentage of the float for Abiomed is extremely high at 19.2%. That means that out of the 32.27 million shares in the tradable float, 6.38 million are sold short by the bears. The bears have also been increasing their bets from the last reporting period by 6.2%, or by about 373,000 shares. If the bears are caught leaning too hard into this quarter, then a big short-squeeze could easily get setoff.

>>5 Stocks Set to Pop on Earnings

From a technical perspective, ABMD is currently trading above both its 50-day and 200-day moving averages, which is bullish. This stock has been uptrending strong since February, with shares soaring from $17.09 to a high of $25.07 a share. During that move, ABMD has been mostly making higher lows and higher highs, which is bullish technical price action. That move has now pushed ABMD within range of a major breakout trade post-earnings.

If you’re bullish on ABMD, I would look for long-biased trades after its report if this stock manages to trigger a break out above some near-term overhead resistance at $24.39 to $25.07 a share with high-volume. Look for volume on that move that registers near or well above its three-month average action of 431,731 shares. If we get that move, then look for AMBD to hit $30 a share or higher if the bulls gain full control of this stock.

I would simply avoid ABMD or look for short-biased trades if the stock fails to trigger that breakout, and then drops back below its 50-day moving average of $22.37 a share with high-volume. Target a drop towards its next significant support zones at $20 to $19 a share or possibly below $18 if the bears slam this stock down post-earnings.

Abiomed was one of the Top 10 Morningstar M&A Stock Picks for 2012.

Children’s Place Retail Stores

My final earnings short-squeeze trade idea is pure-play children’s specialty apparel retailer Children’s Place Retail Stores (PLCE), which is set to release numbers on Thursday before the market open. Wall Street analysts, on average, expect Children’s Place Retail Stores to report revenue of $447.54 million on earnings of $1.05 per share.

If you’re looking for a heavily-shorted stock that’s sold off noticeably heading into its earnings report, then take a close look at shares of Children’s Place Retail Stores. This stock is down 14% so far this year, and it’s well off its March high of $53.89 with shares currently trading at $45.70 a share.

The current short interest as a percentage of the float for Children’s Place Retail Stores is extremely high at 22.6%. That means that out of the 19.94 million shares in the tradable float, 5.36 million are sold short by the bears. This is a huge short-interest on a stock with relatively low float. This is the type of situation that can produce large spikes higher post-earnings if the company can deliver what the bulls are looking for.

From a technical perspective, PLCE is currently trading below both its 50-day and 200-day moving averages, which is bearish. This stock has been downtrending since April, with shares dropping from $53.60 to a recent low of $44.02 a share. During that move, shares of PLCE have been mostly making lower highs and lower lows, which is bearish price action.

If you’re bullish on PLCE, I would wait until after its report and look for long-biased trades if this stock can manage to move back above both its 200-day moving average of $48.24 and its 50-day moving average of $49.20 a share with high-volume. Look for volume on that move that hits near or well above its three-month average action of 697,824 shares. If we get that action, then PCLE could easily trend back towards its March high of $53.98 post-earnings.

I would simply avoid PLCE or look for short-biased trades if it fails to recapture both of those key moving averages, and then drops below some major near-term support levels at $44.02 a share with high-volume. If we get that action, then look for PLCE to drop towards its next significant support zones at $40 to $38 a share if the bears hammer this lower post-earnings.

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

-- Written by Roberto Pedone in Winderemere, Fla.

RELATED LINKS:

>>5 Banks to Buy After JPMorgan's Big Mistake
>>5 Stocks That Make for Healthy Investments

>>5 Stocks Primed for Bigger Dividends

Follow Stockpickr on Twitter and become a fan on Facebook.

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.