Stock Quotes in this Article: AZPN, GES, GSM, HAIN, LZB, MPEL, PSS, PSUN

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. Take that one step further and combine a bullish earnings report with a stock that’s heavily shorted. Now, all of a sudden you have the fuel that can ignite a large short squeeze in any equity.

Short-sellers hate being caught short a stock that announces bullish earning and forward guidance. When this happen, we often see a tradable short-squeeze develop as the bear 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 a big short-covering rally starts that’s sparked by an earnings event.

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.

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 but 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. When you do this you’re letting the trend emerge after the market has digested all of the news.

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    However, 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.

    Pacific Sunwear of California

    My first earnings short squeeze candidate is Pacific Sunwear of California (PSUN), which is set to report its results on Tuesday after the market close. This is a specialty retailer rooted in the action sports, fashion and music influences of the California lifestyle. The company sells casual apparel with a limited selection of accessories and footwear designed to meet the needs of teens and young adults. Wall Street analysts, on average, expect Pacific Sunwear to report revenues of $211.80 million on a loss of 24 cents per share.

    This stock is currently trading near its 52-week low of $1.86 with shares changing hands at around $2 a share. The bears have been coining money ahead of the quarter, since shares of PSUN have fallen from over $4.06 in early May to its current price of under $2. If Pacific Sunwear can report a decent quarter and guide higher, then we could see the bears cover some of their winning short bets and lock in profits. If the bears cover, then then the stock could spike much higher from current levels.

    The current short interest as a percentage of the float for Pacific Sunwear is an extremely large 23.3%. That means that out of the 35.40 million shares in the tradable float, 10.43 million are sold short by the bears. This is a huge short interest on a stock with a very small float. Any short covering rally that’s spurred by bullish news could easily spike this stock significantly higher.

    From a technical standpoint, shares of Pacific Sunwear are trading below both its 50-day and 200-day moving averages, which is bearish. The stock has recently hit a 52-week low and found some buying support at around $1.86 a share. The current reading on the relative strength index (RSI) is flashing an oversold condition at 29. Oversold can always get more oversold, but if the trend changes here for PSUN then this stock could bounce big.

    I would look to buy this stock after they report if you see it trade above $2.22 a share on heavy volume. Look for volume that’s greater than or close to its three-month average volume of 1.1 million shares. I would add to any long position if you see shares of PSUN trade above its 50-day moving average of $2.57 a share on solid volume. Target a run towards $3 to $3.15 a share if the bulls gain control of this stock following their earnings.

    Globe Specialty Metals

    Another stock with the potential to see an earnings short squeeze is Globe Specialty Metals (GSM), which is set to release results on Tuesday after the market close. This company, together with its subsidiaries, produces silicon metal and silicon-based alloys. Wall Street analysts, on average, expect Globe Specialty Metals to report revenues of $166.71 million on earnings of 31 cents per share.

    During the previous quarter, this company reported earnings of 31 cents per share, which easily beat Wall Street estimates of 27 cents per share.

    This is another name that’s been beaten down big by the bears ahead of the quarter, with shares of Globe Specialty falling from $25.67 a share in mid-July to its current price of just over $17 a share. This big beatdown could set the stock up for a sharp rally if the bulls hear what they’re looking for when the company reports.

    The current short interest as a percentage of the float for Globe Specialty Metals sits at around 5.9%. That means that out of the 61.85 million shares in the tradable float, 3.74 million are sold short by the bears.

    From a technical standpoint, this stock is trading below both its 50-day and 200-day moving average, which is bearish. This stock has recently formed a temporary double bottom at around $16.50 a share. I say temporary because we will have to see if this support zone holds up after they report earnings.

    I would only be a buyer of this stock after they report if it breaks above $18.50 a share on strong volume. Look for volume that’s close to or well above its three-month average action of 966,000 shares. I would add to any long positions if you see this stock trade above $20.62 and then $21.74 a share (200-day moving average) on solid volume. Target $22.50 to $24 a share of the bulls take full control of this stock.

    I would only short this name after they report if the stock drops below that near-term support at around $16.50 a share on heavy volume. I would add to any short positions if it then drops below $14 a share and look for a near-term target of $13 to $12 a share.

    Hain Celestial Group

    One heavily shorted stock in the food processing sector is Hain Celestial Group (HAIN), which is set to release numbers on Tuesday after the market close. This company manufactures, markets, distributes and sells organic products under brand names, which are sold as better-for-you products. Wall Street analysts, on average, expect Hain Celestial Group to report revenues of $270.30 million on earnings of 33 cents per share.

    This company has either met or beat Wall Street estimates over the last four quarters, and they have beat estimates for the past three quarters in a row. During the last quarter, they beat Wall Street estimates by two cents after reporting 36 cents per share. The company has also seen its net income and revenue rise for the past three quarters in a row. An analyst at RBC Capital recently upgraded this stock to sector perform from outperform with a $37 price target.

    The current short interest as a percentage of the float for Hain Celestial Group is a notable 5.6%. That means that out of the 32.70 million shares in the tradable float, 2.26 million are sold short by the bears. This isn’t a super high short interest, but it’s big enough and the float is small, so a positive report could spark a solid spike higher.

    From a technical standpoint, this stock is currently trading below its 50-day and 200-day moving averages, which is bearish. The stock recently found some buying interest at $26 a share but failed to get above its 50-day moving average. Shares are now changing hands at just over $28 a share.

    I would only be a buyer of this stock after they report once it clears its 50-day moving average ($31.70) on strong volume. Look for volume that’s close to or greater than its three-month average action of 366,000 shares. I would add to any long position if it then moves above $33 and target $35 if a short squeeze kicks off.

    I would only short this name if you see it drop below that major near-term support zone at $26 a share following their earnings report. I would add to any shorts if it then takes out $24 a share and target $20 if the bears gain control of this name.

    Guess?

    If you’re looking for an earnings short-squeeze play in the retail apparel sector, then consider Guess? (GES), which is set to release numbers on Wednesday after the market close. This company designs, markets, distributes and licenses apparel and accessories for men, women and children. Wall Street analysts, on average, expect Guess? to report revenues of $656.38 million on earnings of 81 cents per share.

    This company has been performing at a high-level during the past couple of quarters. Guess? has beat Wall Street estimates for the last four quarters in a row and the most recent quarter produced a huge beat that topped estimates by 1l cents. Revenue has also been trending up during the last four quarters between a range of 9.8% and 17.9%.

    The current short interest as a percentage of the float for Guess? is a rather large 6.4%. That means that out of the 69 million shares in the tradable float, 4.34 million are sold short by the bears. It’s worth pointing out that the short-sellers have also been increasing their bets from the last reporting period by 15.6%, or by around 584,000 shares. This notable increase in bearish bets could fuel a big short squeeze if the bears are caught leaning the wrong way into earnings.

    From a technical standpoint, the stock is currently trading significantly below its 50-day and 200-day moving averages, which is bearish. The stock has been hammered during the past few months from a high of $44 a share in mid-July to its current price of just over $31 a share. That said, shares of GES have found some buying support recently at around $30.20 a share.

    The way I would pay this stock is to buy it after they report if it trades above $33 a share on big volume. Look for volume that’s close to or greater than its three-month average action of 1.4 million shares. I would add to any long position once this stock clears some past overhead resistance at around $35 a share. Target a run back towards the 50-day moving average ($38.79) if the bulls can spark a big short squeeze.

    I would only short this name if it drops below that near-term support zone at $30.20 a share on heavy volume after they report. I would add to any short position once shares of GES takes out $28.75 a share on big volume, and target $25 to $23 a share if the bears want to pound this name ever lower.

    Collective Brands

    One final earnings short-squeeze play is Collective Brands (PSS), which is set to release numbers on Wednesday after the market close. This is a producer of compelling lifestyle, fashion and performance brands for footwear and related accessories to consumers worldwide. Wall Street analysts, on average, expect Collective Brands to report revenues of $868.02 million on earnings of 14 cents per share.

    An analyst at DA Davidson cut their price target on Collective Brands recently ahead of the quarter but reaffirmed its their buy rating on the stock. The analyst cut their price target by $1 to $16, which is still a mile away from the stock’s current price of just over $9.50 a share.

    The recent strong earnings report out of Foot Locker (FL) could bode well for Collective Brands for this coming quarter. It doesn’t hurt that the stock is also ridiculously beaten-down in front of the quarter, with shares off from its April high of $22.99 to its current price of just over $9 a share.

    The current short interest as a percentage of the float for Collective Brands is an extremely large 25.8%. That means that out of the 56.22 million shares in the tradable float, 15.56 million are sold short by the bears. It’s worth pointing out that the bears have increased their bets dramatically from the last reporting period by 22.5%, or by around 2.8 million shares. This is a huge increase in new shorts bets on a stock that’s already heavily shorted. If the bears are pressing too much ahead of the quarter, then any good news could spark a massive short squeeze.

    From a technical standpoint, the stock is currently trading significantly below both its 50-day and 200-day moving averages, which is bearish. That said, the stock just found some buying support and formed a temporary double bottom at around $9.11 a share on decent upside volume. If the stock holds that double bottom after they report, then we could have a bottom in place for the stock in the near-term.

    I would look to be an aggressive buyer of this stock after they report if you see shares trade above some near-term overhead resistance at around $10.44 a share on heavy volume. I would look for volume that’s either close to or greater than its three-month average action of 2 million shares. I would add to any long position above $12 a share and target a run back towards the 50-day moving average ($12.81) or $14 a share if the bulls take full control of this stock.

    I would only short this name if it drops below $9.11 a share on big volume after the company reports. A drop below that near-term support zone could set this stock up for a test of the next significant support level at around $7.13 a share.

    To see more potential earnings short squeeze candidates like Melco Crown Entertainment (MEPL), Aspen Technology (AZPN) and La-Z-Boy (LZB), 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, the 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.