Stock Quotes in this Article: FAST, JBHT, OZRK, SWY, WGO

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 time frame 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 by waiting. That’s why it can be worth betting prior to the report -- but only if the stock is acting technically very bullish and you have a very strong conviction that it is going to rip higher. Just remember that even when you have that conviction and 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 for a heavily shorted stock and then jump in and trade the prevailing trend.

With that in mind, here’s a look at several stocks that could experience big short squeezes when they report earnings this week.

Fastenal

My first earnings short-squeeze play today is Fastenal (FAST), which is engaged in the wholesale distribution of industrial and construction supplies in North America, and is set to release numbers on Thursday before the market open. Wall Street analysts, on average, expect Fastenal to report revenue of $804.90 million on earnings of 37 cents per share.

During the last quarter, Fastenal beat Wall Street estimates by 1 cent after reporting a profit of 38 cents per share, vs. an average estimate of 37 cents per share. This company reported in line results for the first quarter. Fastenal is looking to extend its streak of double-digit earnings growth to its fifth-straight quarter this period. The company has averaged year-over-year revenue growth of 19.2% over the last four quarters.

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The current short interest as a percentage of the float for Fastenal stands at 5.7%. That means that out of the 269.87 million shares in the tradable float, 15.35 million shares are sold short by the bears. This isn’t a huge short interest, but it’s more than enough to spark a decent short-squeeze if FAST can deliver the news the bulls are looking for.

From a technical perspective, FAST is currently trading above its 50-day moving average and below its 200-day moving average, which is neutral trendwise. This stock has been trending sideways for the last two months, with shares moving between $41.50 on the downside and $45.30 on the upside. A move outside of that trading pattern post-earnings will likely setup the next major trend for FAST.

If you’re bullish on FAST, then I would wait until after its report and look for long-biased trades once it manages to break out above some near-term overhead resistance levels at $45.28 to $45.33 a share with high volume. Look for volume on that move that registers near or above its three-month average action of 1.8 million shares. If that breakout triggers, then look for FAST to re-test or possibly take out its next major overhead resistance levels at $47.75 to $54.61 a share.

I would simply avoid FAST or look for short-biased trades if after earnings it fails to trigger that breakout and then drops below some near-term support levels at $42 to $41.48 a share with heavy volume. If we get that move, then FAST will setup to re-test or possibly take out its next major support levels at $39 to $38 a share.

Safeway

Another potential earnings short-squeeze play is retail food and drug chain Safeway (SWY), which is set to release its numbers on Thursday before the market open. Wall Street analysts, on average, expect Safeway to report revenue of $10.24 billion on earnings of 46 cents per share.

Goldman Sachs recently said that shares of Safeway continue to be at a trough and short interest remains at its highest. The firm thinks the muted results and low expectations may cause a short-squeeze.

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The current short interest as a percentage of the float for Safeway is extremely high at 30.9%. That means that out of the 237.92 million shares in the tradable float, 70.11 million shares are sold short by the bears. The bears have also been increasing their bets from the last reporting period by 5.1%, or by about 3.53 million shares. If the shorts are caught pressing too hard into this quarter, then we could see a large short-squeeze develop post-earnings.

From a technical perspective, SWY is currently trading above its 50-day moving average and below its 200-day moving average, which is neutral trendwise. This stock has been trending sideways for the past month and change, with shares moving between $15.50 on the downside and around $17 on the upside. A move outside of that trading range post-earnings will likely setup the next major trend for SWY.

If you’re in the bull camp on SWY, then I would wait until after its report and look for long-biased trades if this stock can manage to break out above some past overhead resistance levels at $16.74 to $16.92 a share with high volume. Look for volume on that move that hits near or above its three-month average volume of 7 million shares. If SWY triggers that breakout, then this stock will have a great chance of re-testing or possibly taking out its next major overhead resistance levels at its 200-day at $18.61 and at $19.11 a share. This stock could even hit $22 to $23 if those levels get taken out with volume.

I would simply avoid SWY or look for short-biased trades if after earnings this stock fails to trigger that breakout and then drops back below some key near-term support at $15.86 to $15.50 a share with high volume. If we get that move, then SWY will setup to re-test or possibly take out its next major support levels at $14.74 to $14.58 a share post-earnings. Any move below $14.58 will push SWY into new 52-week-low territory, which would be bearish technical price action.

Bank of the Ozarks

Another short-squeeze play today is regional banking player Bank of the Ozarks (OZRK), which is set to release numbers on Thursday after the market close. Wall Street analysts, on average, expect Bank of the Ozarks to report revenue of $60 million on earnings of 55 cents per share.

This stock has been trending modestly strong so far in 2012, with shares up around 14% so far. Shares of OZRK are now trading very close to its 52-week high of $34.98 a share ahead of its earnings report.

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The current short interest as a percentage of the float for Bank of the Ozarks is rather high at 11.2%. That means that out of the 29.32 million shares in the tradable float, 3.35 million shares are sold short by the bears. The bears have also been increasing their bets from the last reporting period by 2.7%, or by about 87,000 shares. If the bears are pressing too hard here, then we could easily see a sizable short-squeeze develop post-earnings.

From a technical perspective, OZRK is currently trading above both its 50-day and 200-day moving averages, which is bullish. This stock has been uptrending very strong for the last four months, with shares soaring from a low of $27.71 to its recent high of $34.93 a share. During that sharp move higher, shares of OZRK have been mostly making higher lows and higher highs, which is bullish technical price action. That move has now pushed OZRK within range of triggering a near-term breakout trade post-earnings.

If you’re in the bull camp on OZRK, then I would wait until after its earnings report and look for long-biased trades if this stock manages to break out above some near-term overhead resistance levels at $34.50 to $34.93 a share with high volume. Look for volume on that move that registers near or above its three-month average action of 148,663 shares. If we get that move, then OZRK will enter new 52-week-high territory post-earnings, which will be bullish technical price action. Some possible upside targets are $40 to $45.

I would simply avoid OZRK or look for short-biased trades if after earnings it fails to trigger that breakout, and then moves back below its 50-day at $33.07 a share with high volume. If we get that move, then OZRK will setup to re-test or possibly take out its next major support levels at $32 to $31.30 a share, or possible even its 200-day at $30.78 a share.

Winnebago Industries

Another potential earnings short-squeeze trade is motor homes manufacturer Winnebago Industries (WGO), which is set to release numbers on Thursday before the market open. Wall Street analysts, on average, expect Winnebago Industries to report revenue of $160.03 million on earnings of 17 cents per share.

This stock has been uptrending extremely strong so far in 2012, with shares up a whopping 69%. Shares of Winnebago Industries are now trading within just one point of its 52-week high of $13.23 ahead of its report. The current short interest as a percentage of the float for Winnebago Industries is notable at 6.6%. That means that out of the 28.98 million shares in the tradable float, 1.90 million shares are sold short by the bears.

From a technical perspective, WGO is currently trading above both its 50-day and 200-day moving averages, which is bullish. This stock has been on fire during the last six months, with shares trading from a low of $8.30 to its recent high of $13.23 a share. During that sharp move higher, shares of WGO have been consistently making higher lows and higher highs, which is bullish technical price action. That move has now pushed WGO within range of triggering a near-term breakout trade post-earnings.

If you’re bullish on WGO, then I would wait until after its report and look for long-biased trades if this stock can manage to break out above some near-term overhead resistance levels at $13 to $13.23 a share with high volume. Look for volume on that move that tracks in at near or above its three-month average action of 219,297 shares. If WGO triggers that breakout, then this stock will setup to re-test or possibly take out its next significant overhead resistance levels at $16 to $16.60 a share.

I would avoid WGO or look for short-biased trades if after earnings it fails to trigger that breakout and then drops back below its 50-day at $11.60 a share with high volume. If we get that action, then WGO will setup to re-test and possibly take out its next major support levels at $10.56 to its 200-day at $9.89 a share.

J.B. Hunt Transport Services

Another earnings short-squeeze play in the trucking complex is J.B. Hunt Transport Services (JBHT), which is set to release numbers on Thursday after the market close. This company operates as a surface transportation and delivery services to a diverse group of customers and consumers throughout the continental U.S., Canada and Mexico. Wall Street analysts, on average, expect J.B. Hunt Transport Services to report revenue of $1.28 billion on earnings of 67 cents per share.

This stock has been trending modestly strong so far in 2012, with shares up around 22%. Shares of JBHT are now trading about seven points off its 52-week high of $61.18 ahead of its report.

The current short interest as a percentage of the float for J.B. Hunt Transport Services sits at 4.9%. That means that out of the 90.60 million shares in the tradable float, 4.39 million shares are sold short by the bears. The bears have also been increasing their bets from the last reporting period by 10%, or by about 133,000 shares. If the bears are caught pressing their bets into the quarter, then we could see JBHT spike significant higher post-earnings.

From a technical perspective, JBHT is currently trading above both its 50-day and 200-day moving averages, which is bullish. This stock recently bounced off a low of $50.56 a share, and trended higher back above both its 50-day and 200-day moving averages. That move has now pushed JBHT within range of triggering a near-term breakout trade post-earnings.

If you’re bullish on JBHT, then I would wait until after its report and look for long-biased trades if this stock can manage to break out above some near-term overhead resistance levels at $56.09 to $56.36 a share with high volume. Look for volume on that move that hits near or above its three-month average volume of 1.1 million shares. If JBHT can trigger that move, then look for this stock to re-test or possibly take out its next major overhead resistance levels at $60.04 to $61.02 a share.

I would avoid JBHT or look for short-biased trades if after earnings it fails to trigger that breakout, and then drops back below its 50-day at 53.43 and its 200-day at $53.41 a share with heavy volume. If we get that action, then JBHT will setup to re-test or possibly take out its next major support levels at $52 to $50.56 a share.

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.