Stock Quotes in this Article: EPM, LRN, OPTT, PIR, PLL

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.

Pall

My first earnings short-squeeze play is diversified machinery player Pall (PLL), which is set to report results on Wednesday after the market close. This company manufactures and markets filtration, purification and separation products and integrated systems solutions worldwide. Wall Street analysts, on average, expect Pall to report revenue of $718.79 million on earnings of 77 cents per share.

Pall has posted a profit for the last eight quarters, and for the last four, profit has trended higher year over year by an average 24.4%. During the fourth quarter of last year, Pall posted its largest jump profit of 77.2%.

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The current short interest as a percentage of the float for Pall stands at 6.3%. That means that out of the 116.20 million shares in the tradable float, 7.3 million are sold short by the bears. The bears have also been increasing their bets from the last reporting period by 4.9%, or by about 342,000 shares.

From a technical perspective, PLL is currently trading above both its 50-day and 200-day moving averages, which is bullish. This stock has been uptrending strong off its July low of $49.77 to its recent high of $57.93 a share. During that uptrend, shares of PLL have consistently been making higher lows and higher highs, which is bullish price action. That move has now pushed PLL within range of triggering a breakout trade post-earnings.

If you’re bullish on PLL, then I would wait until after its report and look for long-biased trades if this stock can manage to break out above some overhead resistance levels at $57.93 to $58.72 a share with high volume. Look for volume on that move that hits near or above its three-month average volume of 776,867 shares. If that breakout triggers, then look for PLL to re-test and possibly take out its next major overhead resistance level at $60.38 a share. If that $60.38 level gets taken out, then PLL could tag $64 a share or higher post-earnings.

I would simply avoid PLL or look for short-biased trades if after earnings it fails to trigger that breakout and then drops below its 200-day moving average of $56.75 a share with heavy volume. If we get that move, then PLL will setup to re-test or possibly take out its 50-day moving average of $54.03 a share. If that 50-day gets taken out, then PLL could drop back towards $52 to $50 a share post-earnings.

Pier 1 Imports

Another earnings short-squeeze play in is specialty retailer of decorative home furnishings and gifts Pier 1 Imports (PIR), which is set to release its numbers on Thursday before the market open. Wall Street analysts, on average, expect Pier 1 Imports to report revenue of $367.17 million on earnings of 19 cents per share.

This stock has been trending bullishly so far in 2012, with shares up over 35%. As we get close to its earnings report, shares of PIR are trading very close to its 52-week high of $19.62 a share.

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The current short interest as a percentage of the float for Pier 1 Imports is pretty high at 9%. That means that out of the 93.45 million shares in the tradable float, 8.27 million shares are sold short by the bears. The bears have also been increasing their bets from the last reporting period by 5.3%, or by about 417,000 shares. If the bears are caught leaning too hard into this quarter, then we could easily see a large short-squeeze develop post-earnings.

From a technical perspective, PIR 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 two months, with shares soaring from a low of $15.12 to its recent high of $19.62 a share. During that uptrend, shares of PIR have consistently made higher lows and higher highs, which is bullish technical price action. That move has now pushed PIR within range of triggering a major breakout trade post-earnings.

If you’re in the bull camp on PIR, then I would wait until after its report and look for long-biased trades if this stock manages to trigger a break out to a new 52-week high above $19.62 a share with heavy volume. Look for volume on that move that registers near or above its three-month average action of 1.6 million shares. If we get that breakout, then look for PIR to head well north of $20 a share post-earnings.

I would simply avoid PIR or look for short-biased trades if after earnings this stock fails to trigger that breakout and then moves below some near-term support levels at $18.50 to $18 a share with heavy volume. If we get that move, then PIR will setup to re-test or possibly take out its 50-day moving average of $17.24 a share.

K12

Another potential earnings short-squeeze trade is technology-based education player K12 (LRN), which is set to release numbers on Thursday before the market open. This company offers curriculum and educational services designed to facilitate individualized learning for students in kindergarten through 12th grade. Wall Street analysts, on average, expect K12 to report revenue of $165.39 million on a loss of 3 cents per share.

This stock has been off to a hot start so far in 2012, with shares up over 30%. Despite that hot start, shares of K12 are trending well off its 52-week high of $37 a share as we move close to its earnings report.

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The current short interest as a percentage of the float for K12 is extremely high at 41.1%. That means that out of the 26.14 million shares in the tradable float, 10.42 million shares are sold short by the bears. The bears have also been increasing their bets from the last reporting period by 1.1%, or by about 113,000 shares.

From a technical perspective, LRN 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 month, with shares skyrocketing from a low of $17.19 to its recent high of $23.94 a share. During that sharp move higher, shares of LRN have been mostly making higher lows and higher highs, which is bullish technical price action. That move has now moved LRN within range of triggering a major breakout trade post-earnings.

If you’re bullish on LRN, then I would wait until after its report and look for long-biased trades if this stock can manage to take out some overhead resistance levels to $23.94 to $25.39 a share with high volume. Look for volume on that move that registers near or above its three-month average action of 250,186 shares. If we get that breakout, then look for LRN to re-test and possibly take out its next major overhead resistance levels at $26.40 to $28.83 a share.

I would avoid LRN or look for short-biased trades if after earnings it fails to trigger that breakout and then drops below its 200-day at $22 and its 50-day at $21.10 a share with heavy volume. If we get that action, then LRN will setup to re-test and possibly take out its next major support level at $20.28 a share.

Evolution Petroleum

A possible earnings short-squeeze trade in the oil and gas complex is Evolution Petroleum (EPM), which is set to release numbers on Wednesday after the market close. This is a petroleum company engaged primarily in the acquisition, exploitation and development of properties for the production of crude oil and natural gas, onshore in the U.S. Wall Street analysts, on average, expect Evolution Petroleum to report revenue of $4.82 million on earnings of 5 cents per share.

The current short interest as a percentage of the float for Evolution Petroleum sits at 4.6%. That means that out of the 14.36 million shares in the tradable float, 1.03 million shares are sold short by the bears. This stock has a decent short interest and an extremity low tradable float. Any bullish earnings news could easily spark a solid short-covering rally post-earnings.

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From a technical perspective, EPM is currently trading below both its 50-day and 200-day moving averages, which is bearish. This stock has been trading within a range for the past three months, with shares moving between $7.50 on the downside and $8.99 on the upside. A move outside of that range post-earnings will likely setup the next major trend for EPM.

If you’re in the bull camp on EPM, then I would look for long-biased trades after earnings if this stock manages to trigger breakout trade above some near-term overhead resistance levels at $8.56 to $8.60 a share with high volume. Look for volume on that move that registers near or above its three-month average action of 58,567 shares. If that breakout triggers, then EPM will setup to re-test or possibly take out its next major overhead resistance level at $8.99 a share. If that $8.99 level gets taken out, then EPM could tag its 52-week high of $10.14 a share or higher post-earnings.

I would simply avoid EPM or look for short-biased trades after earnings the stock fails to trigger that breakout and then moves back below some major near-term support areas at $8 a share with high volume. If we get that move, then EPM will setup to re-test and possibly take out its next major support levels at $7.75 to $7.50 a share. A move below $7.50 will most likely take EPM back down towards $6.80 to $6.50 a share post-earnings.

Ocean Power Technologies

My final earnings short-squeeze play today is Ocean Power Technologies (OPTT), which is set to release numbers on Friday before the market open. This company develops and is commercializing systems that generate electricity by harnessing the renewable energy of ocean waves. Wall Street analysts, on average, expect Ocean Power Technologies to report revenue of $2 million on a loss of 32 cents per share.

This stock is off to a decent start so far in 2012, with shares up by around 20%.

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The current short interest as a percentage of the float for Ocean Power Technologies is decent at 6.4%. That means that out of the 9.78 million shares in the tradable float, 624,000 shares are sold short by the bears. Any bullish earnings news from OPTT could easily spark a solid short-covering rally post-earnings, since this stock has plenty of shorts and very small float.

From a technical perspective, OPTT 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 two months, with shares soaring from $2.30 to its recent high of $3.50 a share. During that large spike higher, shares of OPTT have mostly made higher lows and higher highs, which is bullish technical price action. That move has now pushed OPPT within range of triggering a major breakout trade post-earnings.

If you’re bullish on OPTT, then I would wait until after its report and look for long-biased trades if this stock manages to break out above some near-term overhead resistance at $3.50 a share with high volume. Look for volume on that move that registers near or above its three-month average action of 108,353 shares. If we get that breakout, then look for OPTT to re-test or possibly take out its next major overhead resistance level at $3.97 to $5.60 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.