Stock Quotes in this Article: BRLI, LULU, MTN, TITN, XIDE

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.

----------------------------------------------------------

More From Stockpickr

  • 5 Blue-Chip Stocks to Avoid
  • 5 Stocks to Buy to Be Like Buffett
  • 4 Loser Stocks Poised for Big Rebounds
  • ----------------------------------------------------------

    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.

     

    Titan Machinery

    My first earnings short-squeeze trade idea is construction services player Titan Machinery (TITN), set to report results on Thursday before the market open. This company owns and operates a network of agricultural and construction equipment stores in the U.S. and Europe. Wall Street analysts, on average, expect Titan Machinery to report revenues of $391.13 million on earnings of 38 cents per share.

    On Monday, research analysts at M Partners reaffirmed their buy rating on Titan Machinery with a $42.50 price target. The analyst wrote, “The first 5 months of 2012, we have seen commodity prices trend upward towards previously set peak prices and we believe these historically high or peak commodity prices will carry through calendar 2012 which in turn should translate into another year of solid agricultural equipment sales for Titan.”

    The current short interest as a percentage of the float for Titan Machinery is rather high at 13.6%. That means that out of the 16.78 million shares in the tradable float, 2.30 million shares are sold short by the bears. This is a very high short interest on a stock with low float. If Titan Machinery can deliver the numbers that the bulls are looking for, then this stock could easily see a huge short-squeeze post-earnings.

    From a technical perspective, TITN is currently trading above its 200-day moving average and below its 50-day moving average, which is neutral trendwise. This stock recently formed a double top at around $36.92 to $36.70 a share, and subsequently dropped back below its 50-day and down to a low of $28.33. After that drop, TITN has formed a near-term double bottom at $28.33 to $28.39 a share.

    If you’re in the bull camp on TITN, I would wait until after they release earnings and look for long-biased trades if this stock can hold that recent low of $28.33, and then break out back above its 50-day moving average of $31.82 a share with high-volume. Look for volume on that move that registers near or above its three-month average action of 492,361 shares. If we get that action, then TITN could easily spike big back toward its 52-week high of $36.92 a share post-earrings.

    I would simply avoid TITN or look for short-biased trades if after earnings it fails to trigger that move back above its 50-day, and then drops below that near-terms support at $28.39 a share with high-volume. If we get that action, then TITN could slice below its 200-day moving average of $25.40 a share if the bears hammer this lower post-earnings.

    Lululemon Athletica

    Another potential earnings short-squeeze trade is apparel player Lululemon Athletica (LULU), which is set to release its numbers on Thursday before the market open. This company is a designer and retailer of technical athletic apparel operating primarily in North America and Australia. Wall Street analysts, on average, expect Lululemon Athletica to report revenue of $270.57 million on earnings of 30 cents per share.

    UBS is out with a note this morning on shares of Lululemon Athletica. The firm’s checks indicate that first-quarter markdowns were controlled and online selling was strong. That analyst expects Q2 sales upside but less than Q1 given softness in Canada and gross margin pressure. UBS has a buy rating on the stock with a $91 price target.

    The current short interest as a percentage of the float for Lululemon Athletica is high at 10.8%. That means that out of the 100.87 million shares in the tradable float, 10.93 million shares are sold short by the bears. This is a decent short interest, so look for a big spike post-earnings of this company can deliver what the bulls are looking for.

    From a technical perspective, LULU is currently trading below its 50-day moving average and above its 200-day moving average, which is neutral trendwise. This stock recently ran into some selling pressure at around $81.09 a share, and subsequently dropped back below its 50-day to a recent low of $66.01 a share. Since hitting that low, shares of LULU ran back up to its 50-day but was hit with selling pressure again.

    If you’re bullish on LULU, I would wait until after they report and look for long-biased trades if this stock can manage to trigger a breakout above its 50-day at $73.39, and then above some near-term overhead resistance at $74.63-to-$75.74 a share with high volume. Look for volume on that move that hits near or above its three-month average action of 2,196,410 shares. If we get that move, then look for LULU to re-test its recent high of $81.09 a share and potentially take it out.

    I would simply avoid LULU or look for short-biased trades if after earnings this stock fails to trigger that breakout and then drops below some near-term support at $67.84-to-$66.01 a share with heavy volume. If we get that action, then look for LULU to re-test its 200-day moving average at $60.91 a share and possibly take that level out to the downside.

    Bio-Reference Laboratories

    One potential earnings short-squeeze play in the medical laboratories and research complex is Bio-Reference Laboratories (BRLI), set to release numbers Thursday before the market open. This company is engaged in providing laboratory-testing services to customers in the greater New York metropolitan area, as well as to customers in other states. Wall Street analysts, on average, expect Bio-Reference Laboratories to report revenue of $161.48 million on earnings of 32 cents per share.

    The current short interest as a percentage of the float for Bio-Reference Laboratories is extremely high at 22.6%. That means that out of the 24.57 million shares in the tradable float, 5.56 million shares are sold short by the bears. The bears have also been increasing their bets from the last reporting period by 4.4%, or by about 234,000 shares. This is a large short-interest on a stock with a very small float. If Bio-Reference Laboratories beats earnings and raises forward guidance, then this stock could explode to the upside post-earnings.

    From a technical perspective, BRLI is currently trading below its 50-day moving average and above its 200-day moving average, which is neutral trendwise. During the last three months, BRLI has been downtrending from a high of $24.48 to a recent low of $18.29 a share. During that move lower, shares of BRLI have consistently made lower highs and lower lows, which is bearish technical price action. That said, BRLI could be ready to reverse that trend if it can return to a chart pattern of higher highs and higher lows post-earnings.

    If you’re in the bull camp on BRLI, then 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 $21.73, and then above some near-term overhead resistance at $22.51 a share with high-volume. Look for volume on that move that registers near or above its three-month average action of 200,945 shares. If we get that action, then the bulls could push BRLI back up towards $23 to $24.50 a share or higher post-earnings.

    I would avoid BRLI or look for short-biased trades if the stock fails to maintain a trend above its 50-day at $21.73 and then drops below some major near-term support at $18.29 a share with high volume. If we get that move, then look for BRLI to trend down toward $16 to $15.50 a share or lower if the bears spark a selloff post-earnings.

    Exide Technologies

    One earnings short-squeeze play in the industrial goods sector is Exide Technologies (XIDE), which is set to release numbers on Thursday after the market close. This company is a provider of stored electrical energy solutions, and is a manufacturer and supplier of lead-acid batteries for transportation and industrial applications worldwide. Wall Street analysts, on average, expect Exide Technologies to report revenue of $750.48 million on earnings of 8 cents per share.

    If you’re looking for a beaten-down heavily shorted smallcap stock ahead of its earnings report this week, then make a sure to check out shares of Exide Technologies. This stock has plunged off its February high of $4.15 to a recent low of $2.25 a share. That move has pushed the stock right near its 52-week low of $2.22 a share.

    The current short interest as a percentage of the float for Exide Technologies sits at 8.3%. That means that out of the 68.02 million shares in the tradable float, 6.21 million shares are sold short by the bears. This stock could see a decent short-squeeze this week if the company can report solid earnings and raise forward guidance.

    From a technical perspective, XIDE is currently trading below both its 50-day and 200-day moving averages, which is bearish. For the past four months, shares of XIDE have been stuck in a nasty downtrend. During that downtrend, this stock has consistently made lower highs and lower lows, which is bearish technical price action. That move has also pushed XIDE into oversold territory, since its current relative strength index is showing a reading of 39.44.

    If you’re bullish on XIDE, I would look for long-biased trades if after they report it manages to trigger a breakout above some near-term overhead resistance at $2.45 a share with high volume. Look for volume on that move that hits near or above its three-month average action of 575,314 shares. If we get that action, then XIDE could easily take out its 50-day moving average of $2.71 a share if the bulls gain full control of this stock post-earnings.

    I would simply avoid XIDE if after earnings the stock fails to trigger that near-term breakout and then drops back below some major near-term support levels at $2.30-to-$2.25 a share with heavy volume.

    Vail Resorts

    My final earnings short-squeeze play is resorts player Vail Resorts (MTN), which is set to release numbers on Wednesday before the market open. This company, through its subsidiaries, engages in the operation of resorts in the U.S. Wall Street analysts, on average, expect Vail Resorts to report revenue of $417.43 million on earnings of $2.19 per share.

    Just this morning, KeyBanc initiated coverage on Vail Resorts with a buy rating and a $60 price target. A KeyBanc analyst said, “Our positive disposition on MTN is premised upon our belief that the risk/reward dynamic appears compelling at current valuation levels. With MTN coming off one of the worst snowfall seasons in history and investor expectations grounded, we view several opportunities as attractive both near-term and longer-term that should drive meaningfully improved profitability in the coming years.”

    The current short interest as a percentage of the float for Vail Resorts is notable at 9.7%. That means that out of the 35.68 million shares in the tradable float, 3.46 million are sold short by the bears. The bears have also been increasing their bets from the last reporting period by 6.5%, or by about 211,000 shares. If the bears are caught leaning too hard into this quarter, then this stock could easily spike significantly higher off a short-covering rally.

    From a technical perspective, MTN is currently trading above both its 50-day and 200-day moving averages, which is bullish. This stock has been trading range-bound for the past month and change, between $44.87 on the upside and $39.94 on the downside. A move outside of that range post-earnings should setup the next major trend for shares of MTN.

    If you’re in the bull camp on MTN, I would wait until after they report and look for long-biased trades if this stock triggers a break out above some near-term overhead resistance at $44.07-to-$44.87 a share with high-volume. Look for volume on that move that’s near or above its three-month average volume of 379,036 shares. If we get that move, then look for MTN to re-test and possibly take out its next major resistance levels at $46.56-to-$47.76 a share.

    I would simply avoid MTN or look for short-biased trades if it fails to trigger that breakout and then drops back below its 50-day at $42.36, and then its 200-day at $41.80 a share with high volume. If we get that move, I would target a drop toward $40-to-$38 a share if the bears slam this stock down 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:

     

     

     

     

    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.