Stock Quotes in this Article: EGHT, FRX, PNFP, UFPI, URI

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.

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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. 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.

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.

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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.

United Rentals

My first earnings short-squeeze candidate today is equipment rental companyUnited Rentals (URI), which is set to report results on Tuesday after the market close United Rentals operates in two segments: general rentals and trench safety, power and HVAC. Wall Street analysts, on average, expect United Rentals to report revenue of $1.08 billion on earnings of 57 cents per share.

During the last quarter, United Rentals reported revenue of $656 million and GAAP sales 25% higher than the previous quarter’s $523 million. The current short interest as a percentage of the float for United Rentals is rather high at 12.7%. That means that out of the 63.40 million shares in the tradable float, 11.84 million shares are sold short by the bears.

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From a technical perspective, URI is currently trading above its 200-day moving average and below its 50-day moving average, which is neutral trendwise. This stock recently sold off from its April high of $47.98 to a low of $29.07 a share. Following that selloff, shares of URI have started to rebound and make higher lows with the stock trading at around $34 a share. If shares of URI can now manage to trigger a near-term breakout trade post-earnings, then this stock will setup for higher highs, which is bullish technical price action.

If you’re in the bull camp on URI, then I would wait until after it reports earnings and look for long-biased trades if this stock can manage to trigger a break out above some near-term overhead resistance at $36.20 to $38.53 a share with high-volume. Look for volume on that move that registers near or above its three-month average action of 3.55 million shares. If we get that move, then URI will be trending back above its 50-day moving average of $35.28 a share, and the stock will have a great chance of trading up towards its next significant overheard resistance level at $44.75 a share.

I would simply avoid URI or look for short-biased trades if after earnings it fails to trigger that breakout and then drops below some near-term support at $31.57 a share high-volume. If we get that move, then URI could easily drop notably lower and take out that recent low of $29.07 a share post-earnings.

Forest Laboratories

Another potential earnings short-squeeze trade is biotechnology and drugs player Forest Laboratories (FRX), which is set to release its numbers on Tuesday before the market open. This company develops, manufactures and sells branded forms of ethical drug products, most of which requires a physician's prescription. Wall Street analysts, on average, expect Forest Laboratories to report revenue of $813.30 million on earnings of 24 cents per share.

This company is looking to top Wall Street estimates for the third quarter in a row this week. During the last quarter, Forest Laboratories beat Wall Street estimates after reporting net income of 78 cents per share vs. estimates of 71 cents per share. During the prior quarter, the company reported a profit of $1.04 a share.

The current short interest as a percentage of the float for Forest Laboratories is notable at 6.3%. That means that out of the 236.46 million shares in the tradable float, 16.6 million shares are sold short by the bears. If Forest Laboratories can deliver the numbers that the bulls are looking for, then this stock could see a tradable shorts-squeeze develop post-earnings.

 

From a technical perspective, FRX is currently trading above both its 50-day and 200-day moving averages, which is bullish. This stock has uptrending for the last six months, with shares trending higher from around $31 to a recent high of $36.44 a share. During that uptrend, shares of FRX have mostly made higher lows and higher highs, which is bullish technical price action. That move has now pushed FRX within range of triggering a near-term breakout trade post-earnings.

If you’re bullish on FRX, then I would wait until after it reports numbers and look for long-biased trades if this stock takes out some near-term overhead resistance at $36.44 a share high volume. Look for volume on that move that hits near or above its three-month average action of 1.9 million shares. If we get that move, then FRX could easily hit $39 to $40 a share post-earnings if the bulls gain full control of this stock.

I would simply avoid FRX or look for short-biased trades if after earnings this stock fails to trigger that breakout and then takes out some near-term support at $34.86 and its 50-day moving average of $34.43 a share with high volume. If we get that move, then FRX will setup to re-test its next significant support levels at $33.04 to its 200-day moving average at $32.44 a share post-earnings.

8x8

One earnings short-squeeze play in the communications complex is 8x8 (EGHT), which is set to release numbers on Wednesday after the market close. This company develops and markets telecommunications services for Internet protocol, telephony and video applications, as well as Web-based conferencing and unified communications services, managed hosting and cloud-based computing services. Wall Street analysts, on average, expect 8x8 to report revenue of $24.86 million on earnings of 4 cents per share.

During the last quarter, this company reported revenue of $24.22 million, and GAAP sales were 333% higher than the previous quarter’s $18.2 million. The current short interest as a percentage of the float for 8x8 is pretty high at 12.6%. That means that out of the 60.76 million shares in the tradable float, 8.49 million shares are sold short by the bears. The bears have also been increasing their bets from the last reporting period by 5.4%, or by about 432,000 shares.

From a technical perspective, EGHT is currently trading above both its 50-day and 200-day moving averages, which is bullish. This stock has been uptrending strong off its May low of $3.80 a share, with shares jumping to its recent high of $4.52 a share. During that uptrend, shares of EGHT have been making higher lows and higher highs, which is bullish technical price action. That move has now pushed EGHT within range of triggering a near-term breakout trade post-earnings.

If you’re bullish on EGHT, then I would wait until after its report and look for long-biased trades if this stock can manage to trigger a break out above some overhead resistance at $4.52 to $4.73 a share with high volume. Look for volume on that move that hits near or above its three-month average action of 419,287 shares. If we get that action, then EGHT could well be on its way of trading north of $5 a share. In fact, this stock could potentially hit or take out its 2011 high of $5.44 a share if the bulls gain full control of this stock post-earnings.

 

I would avoid EGHT if it fails to trigger that breakout after earnings and then look for this stock to re-test its 50-day moving average of $4.13 a share.

Universal Forest Products

One potential earnings short-squeeze play in the forestry and wood products complex is Universal Forest Products (UFPI), which is set to release numbers on Wednesday after the market close. This company, through its subsidiaries, designs, manufactures, and markets wood and wood-alternative products, and other building products for retail building home centers and other retailers, manufactured housing, and industrial markets. Wall Street analysts, on average, expect Universal Forest Products to report revenue of $620.27 million on earnings of 71 cents per share.

This stock has been on fire so far in 2012 with shares up over 27%, and this stock is currently trading just 40 cents off its 52-week high of $40 a share.

The current short interest as a percentage of the float for Universal Forest Products is worth mentioning at 6.4%. That means that out of the 17.80 million shares in the tradable float, 1.15 million shares are sold short by the bears. This stock has a decent short interest and a very low float available for trading. If this company can product the numbers the bulls are looking for, then we could easily see a sharp short-squeeze setup post-earnings.

From a technical perspective, UFPI is currently trading above both its 50-day and 200-day moving averages, which is bullish. This stock has been uptrending strong for the last five months, with shares soaring from a low of $29.24 to a recent high of $40 a share. During that move, shares of UFPI have consistently made higher lows and higher highs, which is bullish technical price action. That move has now pushed UFPI within range of triggering a near-term breakout trade post-earnings.

If you’re in the bull camp on UFPI, then I would look for long-biased trades after earnings if this stock manages to hit a new 52-week high on high volume. Look for volume on that move that registers near or above its three-month average action of 111,740 shares. If we get that move, then UFPI could easily trade up back towards its 2010 high of $45.50 a share.

I would simply avoid UFPI or look for short-biased trades after earnings the stock fails to trigger that breakout, and then moves back below its 50-day moving average of $37.67 a share with high-volume. If we get that move, then UFPI could take out some more near-term support at $36.73, and then fall towards $33.57 a share post-earnings.

Pinnacle Financial Partners

My final earnings short-squeeze trade idea today is regional banking player Pinnacle Financial Partners (PNFP), which is set to release numbers on Tuesday after the market close. This company provides a range of banking services, including investment, mortgage, and insurance services, and wealth management services, in its primary market areas of the Nashville-Davidson-Murfreesboro-Franklin, Tennessee and Knoxville, Tennessee. Wall Street analysts, on average, expect Pinnacle Financial Partners to report revenue of $314.46 million on earnings of 44 cents per share.

This stock is up over 20% during the last six months, and the stock is currently trading just 50 cents off its 52-week high of $19.84 a share. The current short interest as a percentage of the float for Pinnacle Financial Partners is pretty high at 9.4%. That means that out of the 31.93 million shares in the tradable float, 3.03 million are sold short by the bears.

From a technical perspective, PNFP is currently trading above both its 50-day and 200-day moving averages, which is bullish. This stock recently found some big buying interest at around $16.65 a share and the stock subsequently soared to its recent high of $19.84 a share. During that sharp move higher, shares of PFNP have been making higher lows and higher highs, which is bullish technical price action. That move has now pushed PNFP within range of triggering a near-term breakout trade.

If you’re bullish on PNFP, then I would wait until after its report and look for long-biased trades if it can manage to trigger a break out above some near-term overhead resistance at $19.84, or above a new 52-week high on high volume. Look for volume on that move that registers near or above its three-month average action of 154,225 shares. If we get that action, then PFNP could hit $23 to $25 a share if it continues its uptrend post-earnings.

I would simply avoid PNFP or look for short-biased trades if it fails to trigger that breakout, and then moves back below some major near-term support at $18.63 a share with high-volume. If we get that move, then PNFP will setup to re-test and possibly take out its 50-day moving average of $17.82 a share 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.

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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.