Stock Quotes in this Article: AIR, CLC, DMND, PIR, RIMM

 WINDERMERE, Fla. (Stockpickr) -- News events have the power to create big volatility in stocks, and one event that can move them substantially higher or lower is an earnings release. Combine a bullish earnings report with a stock that’s heavily shorted, and you have the fuel that can ignite a large short squeeze.

Short-sellers hate being caught short a stock that announces bullish earning and forward guidance. When this happens, we often see a tradable short squeeze develop as the bears 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 earnings spark a big short-covering rally.

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.

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

More From Stockpickr

  • 7 Top Stocks That Should Continue to Outperform
  • 5 Rocket Stock to Buy This Week
  • 5 Earnings Trades for a Highly Correlative Market
  • ----------------------------------------------------------

    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 from off a short squeeze. That way, you let the trend emerge after the market has digested all of the news.

    Of course, sometimes the stock is going to be in such high demand that by waiting, you will miss a lot of the move. That’s why it’s 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.

    Research In Motion

    My first earnings short-squeeze play is Research In Motion (RIMM), which is set to report its results on Thursday after the market close. RIM is a designer, manufacturer and marketer of wireless solutions for the worldwide mobile communications market. Wall Street analysts, on average, expect the company to report revenue of $4.47 billion on earnings of 87 cents per share.

    If you’re looking for a stock with very low expectations going into the quarter, Research In Motion could be for you. Wall Street analysts are expecting net income to fall by about 40% from the same period last year when RIM reports. Despite that extremely weak outlook, a number of analysts are optimistic on the stock ahead of the quarter.

    For example, an analyst at Sterne Agee said today that he expects a decent quarterly result and not-horrible guidance for the quarters ahead. Morgan Stanley is also bullish on the quarter and believes fiscal third-quarter smartphone guidance will be strong. Wedbush sees results falling in line or better than guidance and maintains a $35 price target on the stock with a neutral rating.

    All RIM has to do to get this stock jazzed is report a quarter that’s not great but at least shows that they have turned the ship around. Since most Wall Street estimates are so depressed, the company has a good shot of delivering some decent upside if it has been able to fix some of its issues.

    The current short interest as a percentage of the float for RIM is worth mentioning at 7.9%. That means that out of the 466.99 million shares in the tradable float, 37.25 million are sold short by the bears. The stock's short-sellers have been coining money as RIM dropped from its May high of $57.32 a share to its current price of just over $30 a share.

    From a technical standpoint, this stock is currently trading above its 50-day moving average but below its 200-day moving average, which is neutral trendwise. During the last month, the stock has found some buying support at around $21 a share, and it rallied up to a recent high of $33.54 a share on strong upside volume.

    I would look to buy this stock after its report once it trades above some near-term resistance at around $30 a share on strong volume. I would watch for volume that’s tracking in close to or greater than its three-month average volume of 25 million shares. I would aggressively to any long position if you see this stock then take out $33.50 a share with volume. A move above that level is key since the next significant resistance areas sit at $35 to $37.50 a share.

    I would get short only if RIM trades below $29 a share following its report on heavy volume. I would add to any short position if the stock then takes out its 50-day moving average of $27.44. Target a drop back towards $25 to $22.50 a share if the bears gain full control of this stock post-earnings.

    RIM shows up on a recent list of 3 Stocks Buffett Won't Buy at Any Price, and I also highlighted it in "5 Breakout Trades on the Radar."

    Pier 1 Imports

    Another stock with the potential to see a large earnings short-squeeze is Pier 1 Imports (PIR), which is set to release results on Thursday before the market open. This company operates as an importer and specialty retailer of imported decorative home furnishings and gifts in the U.S., Canada and Mexico. Wall Street analysts, on average, expect Pier 1 Imports to report revenue of $332.94 million on earnings of 14 cents per share.

    This stock is trending strong into the quarter after share of formed a double-bottom chart pattern in August at $8.60 a share. Since that bottom, the stock has run up to its current price of $10.86 a share which is only a few points off its 52-week high of $12.75 a share.

    The current short interest as a percentage of the float for Pier 1 Imports stands at 7.2%. That means that out of the 97 million shares in the tradable float, 7.33 million are sold short by the bears. This is a decent short interest on a stock that’s trending in the right direction in front of the quarter. If the bulls hear what they want, then we could easily see a sizeable short-squeeze.

    From a technical standpoint, this stock is currently trading above both its 50-day and 200-day moving averages, which is bullish. The stock is also close to breaking out above a key descending trend line that will come into play with a move above the $11.70 area.

    I would be a buyer of this stock after it releases results if it trades above some near-term overhead resistance at $11.25 on strong volume. Look for volume that’s tracking in close to or above its three-month average action of 2.1 million shares. I would add to any long position if it then trades above $11.75 and target a run towards $12.75 or possibly higher if the bulls gain control of this name post-earnings.

    I would short this stock after its report only if it drops below $10.35 a share on strong volume. I would target a drop back towards $9 a share or possibly even lower if the bears knock this name down post-earnings.

    Pir 1, one of Jim Cramer's Stocks to Watch this week, was also featured in "5 Earnings Trades for a Highly Correlated Market."

    Diamond Foods

    An earnings short-squeeze candidate in the food processing complex is Diamond Foods (DMND), which is set to release numbers on Thursday after the market close. This packaged food company specializes in processing, marketing and distributing snack products and culinary, in-shell and ingredient nuts. Wall Street analysts, on average, expect the company to report revenue of $216.34 million on earnings of 44 cents per share.

    Just yesterday, KeyBanc reiterated its buy rating on the stock and raised its price target to $85 a share, predicting strong sales for the company due to increased advertising. This stock is so heavily shorted going into the quarter that the $85 target could get hit post-earnings if Diamond can report strong results.

    The current short interest as a percentage of the float for Diamond Foods is an extremely large 39%. That means that out of the 19.82 million shares in the tradable float, 8.34 million are sold short by the bears. It’s worth noting that the bears have also been increasing their bets from the last reporting period by 6.7%, or by about 522,900 shares.

    From a technical standpoint, this stock is currently trading above both its 50-day and 200-day moving averages, which is bullish. This stock is so strong that despite the recent market slide, shares of DMND are only a few points off its 52-week high of $80.16 a share, with the stock currently trading around $75 a share.

    If you want to buy this stock for an earnings short-squeeze trade, I would wait until after its report and buy it once it trades above $77.50 a share on strong volume. Look for volume that’s tracking in close to or above 219,000 shares. I would then add aggressively to any long position if the stock breaks out above $80.16 a share post-earnings.

    I would short this name after its report only if it drops below some near-term support at $73.05 a share on big volume. A move below that level should set the stock up to trade down towards its next significant support level at $68 or possibly lower if the bears whack this lower post-earnings.

    >>Practice your stock trading strategies and win cash in our stock game.

    AAR

    An earnings short-squeeze play in the aerospace and defense sector is AAR (AIR), which is set to release numbers on Thursday after the market close. AAR is a diversified provider of products and services to the worldwide aviation and government and defense markets. Wall Street analysts, on average, expect the company to report revenue of $457.52 million on earnings of 46 cents per share.

    During the previous quarter, AAR beat Wall Street estimates after they reported earnings per share of 55 cents versus analyst estimates of 46 cents per share. That previous success has done little to help this stock in front of the current quarter. Shares of AAR have been destroyed in the past few months, dropping from its July high of $31.66 to its current price of just over $21 a share.

    The current short interest as a percentage of the float for AAR is worth noting at 6.8%. That means that out of the 36.46 million shares in the tradable float, 2.55 million are sold short by the bears. The short-sellers have increased their bets from the last reporting period by 6.8%, or by about 162,900 shares.

    From a technical standpoint, the stock is currently trading well below its 50-day and 200-day moving averages, which is bearish. The stock has also been making lower highs and lower lows since it plunged from $31.66 in late July. This big beaten down now put the stock at a relative strength index reading of 36, which is an extremely oversold reading.

    If you want to play AAR for the potential of an oversold bounce, then I would buy it after its report if the stock trades above $23 and then $24.30 a share on big volume. Look for volume that’s tracking in close to or above its three-month average volume of 375,000 shares. I would target a run back towards its 200-day moving average of $26.40 or possibly higher if the bulls gain control of this stock post-earnings.

    I would short this name only if it drops below $22.80 a share after its report on heavy volume. I would target a drop back towards some previous support at around $18 a share or possibly even lower of the bears hammer this name down post-earnings.

    AAR is one of the highest-yielding aerospace and defense stocks.

    Clarcor

    One more earnings short-squeeze play is Clarcor (CLC), which is set to release numbers on Wednesday after the market close. This is a global provider of filtration products, filtration systems and services, and consumer and industrial packaging products. Wall Street analysts, on average, expect Clarcor to report revenue of $296.27 million on earnings of 66 cents per share.

    This company has beat Wall Street estimates for the last four quarters in a row and they’re just off a quarter where they beat estimates by 8 cents, reporting a profit of 64 cents per share versus a Wall Street mean estimate of 56 cents per share. Clarcor’s profit has jumped year over year by an average of 33.8% over the past five quarters.

    Recently, an analyst at Hilliard Lyons started coverage on Clarcor stock with a buy rating and a $54 price target. That’s not an overreaching price target since the stock currently trades at just under $44 a share and has a forward price-to-earnings of 16.5. Clarcor is estimated to grow at 28.8% this year.

    The current short interest as a percentage of the float for Clarcor sits at around 4%. That means that out of the 49.49 million shares in the tradable float, 2.03 million are sold short by the bears. The bears have also increased their short positions from the last reporting period by 7.1%, or by about 134,700 shares. This isn’t a huge short interest, but it’s more than enough to spark a short-covering rally if Clarcor beats expectations and raises guidance.

    From a technical standpoint, the stock is currently trading above both its 50-day and 200-day moving averages, which is bullish. This stock has been making higher lows and higher highs since August, which is also bullish.

    I would look to be a buyer of this stock after its report if it trades above $46 to $47 a share on strong volume. Look for volume that’s tracking in close to or greater than its three-month average action of 272,700 shares. I would add aggressively to any long position if you then see CLC breakout above some major past resistance at $48.77 a share.

    I would short this name only if it drops below its 200-day moving average of $43.51 a share on big volume after the company reports its results. I would add to any bearish bets if it then drops below $42 a share and target a drop back towards $40 to $39 if the bears pound this stock lower post-earnings.

    Clarcor is one of TheStreet Ratings' top-rated machinery stocks.

    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.

    RELATED LINKS:

    >>5 High-Yield Stocks With Lots of Cash, No Debt
    >>5 Technical Setups to Trade This Week

    >>5 Earnings Trades for a Highly Correlative Market

    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.