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5 Stocks That Could Get Squeezed Higher - 14472 views
WINDERMERE, Fla. (Stockpickr) -- One way to hurt your profit-and-loss statement is to be caught short a stock going into an earnings report when a company delivers a solid set of numbers.
When this happens, and especially when it happens to an equity that’s already heavily shorted, the market can deliver some pain as short-covering causes the stock to rip higher. This scenario can create a “perfect storm” for the bulls as the natural buyers combined with the short-covering cause a supply-and-demand imbalance that spikes the stock to the upside.
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. First, don’t ever bet any amounts of money that will cause you to lose sleep at night. Keep your bets reasonable and only use risk capital, or capital you have designated for speculating with. Also, cut your losses fast when you’re wrong, and don’t be afraid to take the other side of the trade if things don’t set up right. The goal is to capture as much volatility as you can in a very short timeframe.
Remember, you can wait until after the report to trade the stock so you have a better idea of what the trend is. That said, you can miss a lot of the gains if a stock gaps big to the upside or downside right after an earnings report, so trade these plays in the style that you’re most comfortable with.
Here’s a look at a number of stocks that could experience big short squeezes when they report earnings this week.
My first earnings short-squeeze play is Zagg (ZAGG), which is scheduled to release its results on Tuesday after the market close. This company designs, manufactures and distributes protective coverings, audio accessories and power solutions for consumer electronic and handheld devices under the brand names invisibleSHIELD, ZAGGaudio, and ZAGGskins. Wall Street analysts, on average, expect the company to report revenue of $20.59 million on earnings of 10 cents per share. Zagg recently showed up on a list of 9 Diversified Stocks With 100% Buy Ratings.
Zagg makes a ton of protective covering products that are designed specifically for Apple’s (AAPL) iPod, iPhone and iPad, and the strong quarter that Apple reported a few weeks ago should bode well for Zagg. Keep in mind that Zagg isn’t just leveraged to Apple since it also makes protective products for Droid smartphones and Research In Motion’s (RIMM) BlackBerry smartphones. I am expecting a good quarter out of Zagg as long as the company was able to keep expensive like advertising costs inline.
The current short interest as a percentage of the float for Zagg is a ridiculously large 55%. That means that out of the 16.49 million shares that are in the tradable float, 8.24 million are currently sold short by the bears as of April 15. This is a huge short interest on a stock with an extremely low trading float. If Zagg reports strong numbers and bullish guidance, then this stock could easily see a massive short-covering rally.
From a technical standpoint, I like the way this stock is setting up going into the quarter since shares just recently trade above the 50-day moving averageof $7.97 a share. What’s really important now is for Zagg to take out some major near-term overhead resistance levels at around $9.70 and $10.56 a share. These levels seem to be places where the stock sells off, so it’s very important to see those prices taken out following a bullish report in order to see a big short-squeeze.
If you’re bullish on this stock going into the quarter, I would speculate with some slightly out-of-the-money call options for June or July, or I would wait until after the report and buy the equity if it takes out those resistance levels I mentioned above. Since this stock is so heavily shorted, a solid report could send this up substantially, so keep this name on your radar.
My next earnings short-squeeze trade idea is InterOil (IOC), which is set to report its results on Wednesday after the market close. This company primarily engages in the exploration, appraisal, and development of crude oil and natural gas properties in Papua New Guinea and its surrounding Southwest Pacific region. Wall Street analysts, on average, expect the company to report revenues of $267.42 million on earnings of 16 cents per share. InterOil shows up on a recent list of 10 Energy Stocks With Upside.
Crude oil prices have been very strong going into this quarter, so InterOil should be positioned to benefit if management was able to execute their business plan. According to the company’s website, their exploration acreage portfolio is one of the largest held by a single company and comprises petroleum licenses covering about 3.9 million acres. If InterOil saw production gains in this quarter, then they could easily report a bump up in profits.
The current short interest as a percentage of the float InterOil is a rather large 19.1%. That means that out of the 33.28 million shares in the tradable float, 6.8 million are short by the bears as of April 15. These short-sellers have been increasing their bets from the last reporting period by 4%, or by around 311,000 shares. That’s a decent increase, so they could be pressing their bets into the quarter.
From a technical standpoint, this stock has been annihilated during the past couple of months falling from recent highs at around $82 a share to its current level near $59. The stock is trading below both its 50-day and 200-day moving averages, but it has found some big support recently at $55 a share.
It looks like the shorts might have already racked up big gains here in the past few months, so if this company reports anything positive, then we could see a nice short-covering rally. One could play this stock buy buying ahead of the report with a stop just below $55 a share. Or you could wait until after the report and jump in if you see strength since this stock is so heavily shorted.
A big bullish bet on InterOil comes from George Soros, whose Soros Fund Management had a 4.4 million-share stake in the stock as of the most recently reported period.
Another earnings short-squeeze candidate is Petroleum Development (PETD), which is due to report results on Tuesday after the market close. This independent energy company engages in the exploration for and development, production, and marketing of oil and natural gas. Wall Street analysts, on average, expect Petroleum Development to report revenue of $86.12 million on earnings of 3 cents per share.
Natural gas has been a laggard in the commodity complex, and Petroleum Development gets about 82% of its total production from natural gas, most of which is derived from the Rocky Mountain region. That said, if the company saw product growth gains and high demand for natural gas, then we could see a situation where Petroleum Development reports strong profits.
Another natural gas producer, Enterprise Products Partners (EPD), reported record first-quarter profits this morning, but EPD’s stock hasn’t done much off that report, with shares only up about 38 cents recently.
The current short interest as a percentage of the float for Petroleum Development sits at around 12% as of April 15. That means that out of the 23.46 million shares in the tradable float, 2.77 million are sold short by the bears.
From a technical standpoint, the stock just started to trade above its 200-day moving average of $37.31 a share. However, Petroleum Development is still trading below its 50-day moving average of $43.74, and the stock has sold off hard recently from highs of around $49 to its current level of just above $38 a share. That big selloff is the reason I like this play going into earnings. It sets up the stock for a rebound short-squeeze trade if the company can deliver bullish results.
One could buy the equity going into the report and simply cut the trade if you see it start trading back below the 200-day moving average. I would add to the position on the long side if you see Petroleum Development take out some overhead resistance at $39 and $41 a share.
On the bullish side of Petroleum Development is Julian Robertson's Tiger Management, which initiated a new position in the stock in the most recently reported quarter.
Another stock that’s heavily shorted ahead of their report is Sina (SINA), which is set to release numbers on Wednesday after the market close. This company provides online media and mobile value-added services in the People’s Republic of China. Wall Street analysts, on average, expect Sina to report revenues of $95.49 million on earnings of 27 cents per share.
Sina could see a big boost in profits for this quarter due to its red-hot Weibo microblogging site, which has been called the Twitter of China. Recent strong quarters out of Chinese Internet players Baidu.com (BIDU) and Sohu.com (SOHU) should bode well for Sina.
The current short interest as a percentage of the float for Sina stands at 11.2% as of April 15. That means that out of the 61.49 million shares in the tradable float, 6.2 million are sold short by the bears. This is small float situation with a large enough short interest that could easily spark a short covering rally if Sina reports strong results and issues bullish guidance.
I would like to point out that the last time Sina report the stock sold off sharply and then rebounded from $74 a share to hit a yearly high of $147 a share. The stock is now down from $147 to its current price of around $120 going into the quarter.
From a technical standpoint, the stock is still trending above its 50-day moving average of $110.33 a share, and the stock has recently found some support at $110 and $115. That said, shares of Sina have been making lower highs since mid-April which is bearish since it has moved the stock into a short-term downtrend.
My play here is to wait until after Sina reports and only jump in for a short-squeeze trade if you see the stock acting strong and uptrending. I see too much risk in the chart ahead of the report to play this prior to their release. A move above $127.80 would break the lower high chart pattern, so if you see this stock acting strong the next day after its report, then considering jumping in.
My final short-squeeze candidate is Molycorp (MCP), which is set to release numbers on Tuesday after the market close. This is rare earth oxide producer in the Western hemisphere and owns a rare earth project outside of China. Wall Street analysts, on average, expect Molycorp to report revenue of $41.68 million on earnings of 10 cents per share. I recently highlighted the stock in " 4 Stocks With Relative Strength Heading Higher."
Molycorp has been one of the hottest stocks in the market over the past year, with shares up around 573%. The stock recently hit an all-time high at $79.16 a share, but it has sold off hard since hitting that level to its current price of around $67. With prices of rare earth metals at all-time highs, Molycorp should be setting up to report a monster quarter. However, the company is still early into the development stage with many of its projects, so the quarter might not be as big as many bulls are expecting.
The current short interest as a percentage of the float for Molycorp is an extremely large 24.2% as of April 15. That means that out of the 43.72 million shares in the tradable float, 8.94 million are sold short by the bears. The bears have been increasing their bets from the last reporting period dramatically by around 20.9%, or by around 1.5 million shares.
From a technical standpoint, I don’t like that Molycorp recently dropped below some near-term support at around $67.71 a share. Had the stock held that level I would be more bullish on this name going into the report. That said, the stock is still trending above its 50-day moving average of $61.04 and it’s only about 12 points off its all-time high.
One way to play this if you’re bullish is to just buy some out-of-the-money call options so your risk is defined and you’ll capture some big gains if the stock gaps up big following their earnings report. The out-of-the-money calls will give you good leverage at a low cost if you don’t speculate too much into this play. One tell you can use on the stock going into the report is if the stock rebounds off its daily lows (right now $ 66.82) and you see volume increasing dramatically.
Another way to play this is just wait until after they report and jump in once you see a clearly established trend. The bottom line, I expect Molycorp to make a big move since the short interest is so high and this stock is so popular. We could easily see a 20% or more move once they report earnings.
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.
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.