Stock Quotes in this Article: ACTG, CBST, CPHD, MTG, TZOO

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 to ignite a large short squeeze.

Short-sellers hate being caught short a stock that announces bullish earning and forward guidance. When this happen, 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 an earnings event 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 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.

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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 from off a short squeeze. That 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 will miss 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 explode higher.

    Earlier this week, I featured five earnings short-squeeze candidates. Here’s a look at several more stocks that could experience big short squeezes when they report earnings this week.

     

    Cubist Pharmaceuticals

    My first earnings short-squeeze trade is biopharmaceutical company Cubist Pharmaceuticals (CBST), which is set to report its results on Wednesday after the market close. Wall Street analysts, on average, expect Cubist to report revenue of $182.91 million on earnings of 31 cents per share.

    This company has beaten Wall Street estimates for the last four quarters and is coming off a quarter in which it smashed estimates by 10 cents, reporting net income of 51 cents per share against Wall Street projections of 41 cents per share. The stock is tending very strong heading into the quarter with shares trading just a few points off its 52-week high of $39.29.

    The current short interest as a percentage of the float for Cubist is a rather large 14.6%. That means that out of the 60.85 million shares in the tradable float, 8.86 million are sold short by the bears. It’s worth pointing out that the bears have also been increasing their bets from the last reporting period by 4.2%, or by about 360,800 shares. If the bears are pressing too aggressively into this quarter, then this stock could easily see a large short squeeze.

    >>10 Most-Shorted Stocks in Biotech

    From a technical standpoint, this stock is currently trading above both its 50-day and 200-day moving averages, which is bullish. This stock has been uptrending strong since August with shares printing higher lows and higher highs for the majority of the time. The stock is now setting up for a technical breakout post-earnings if the bulls get the news they’re looking for.

    I would look to buy this stock after they report earnings if the stock can manage to trigger a major breakout above $38.50 to $39.29 a share on big volume. Look for volume that’s tracking in close to or above its three-month average action of 1.14 million shares. If we do see the breakout post-earnings, then this stock will be trading in all-time high territory.

    Cubist is one of TheStreet Ratings' top-rated biotech stocks.

    >>11 Biotech Stocks Loved or Hated by Hedge Funds

    Acacia Research

    Another stock with the potential to see an earnings short-squeeze is Acacia Research (ACTG), which is set to release results on Thursday after the market close. This company, through its operating subsidiaries, acquires, develops, licenses and enforces patented technologies. Wall Street analysts, on average, expect Acacia Research to report revenue of $46.53 million on earnings of 31 cents per share.

    This stock has been beaten down pretty big in front of the quarter; shares have dropped from their September high of $47.24 to a recent low of $32.07. This could be setting Acacia up for a sharp rebound if it can report strong earnings and bullish guidance.

    The current short interest as a percentage of the float for Acacia Research stands at 6.2%. That means that out of the 41.40 million shares in the tradable float, 2.58 million are sold short by the bears. This is more than enough short-sellers in the stock to spark a tradable short-squeeze post-earnings if the bulls get what they want.

    >>5 Rocket Stocks for Earnings Season

    From a technical standpoint, this stock is currently trading below both its 50-day and 200-day moving averages, which is bearish. The stock recently rebounded sharply off $32 a share to trade back towards its current price of just over $38 a share. This stock has found solid buying support during the past 5 months every time it has traded near $32 to $31 a share.

    I would be a buyer of Acacia after it report its results if the stock can manage to trade back above its 50-day moving average of $39.69 a share on strong volume. Look for volume that’s tracking in close to or above its three-month average volume of 577,300 shares. I would add aggressively to any long position if the stock then takes out $42 a share. Target a run back towards $47 a share if those levels are taken out with volume post-earnings.

    I would only short this stock after earnings if it drops below $37 and $35.49 a share (50-day moving average) on heavy volume. Target a drop back toward that big support zone near $32 a share if the bears beat this stock down post-earnings.

    Acacia is one of the top holdings of George Soros.

    MGIC Investment

    Mortgage insurance provider MGIC Investment (MTG) is set to release numbers on Friday before the market open. Wall Street analysts, on average, expect the company to report revenues of $335.99 million on a loss of 60 cents per share.
    If you’re looking for a highly speculative stock that’s been crushed in front of earnings, then MGIC Investment is a good one to consider. This stock just plunged from its June high of $8.18 to its current price around $2.50 a share. Any good earnings news from MGIC and this stock is going to skyrocket off these depressed levels.

    The current short interest as a percentage of the float for MGIC Investment is an extremely large 16.5%. That means that out of the 186.66 million shares in the tradable float, 30.51 million are sold short by the bears. It’s also worth mentioning that the bears have been increasing their bets recently by 10.2%, or by about 2.81 million shares.

    >>20 Highest-Yielding Insurance Stocks

    From a technical standpoint, this stock is currently trading just above its 50-day moving average and well below its 200-day moving average, which is neutral trendwise. On Tuesday, this stock crossed back above its 50-day moving with monster volume. Volume registered 15.5 million shares, which is significantly higher than its three-month average of 4.95 million shares. I consider it very bullish technically when any stock crosses above a key moving average with monster volume, especially in front of earnings.

    If you want to play this stock for an earnings short-squeeze play, I would look to be a buyer after its report once it trades back above $2.60 to $3 a share on strong volume. If those levels are taken out post-earnings, then this stock should set up nicely to run back towards $4.55 a share or possibly even higher if the bulls set of a giant short-squeeze. I would avoid any long trade in this stock if shares drop below the 50-day moving average of $2.33 a share after earnings with strong volume.

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

    Travelzoo

    Internet travel deal company Travelzoo (TZOO) is set to release numbers on Thursday before the market open. Wall Street analysts, on average, expect Travelzoo to report revenue of $38.20 million on earnings of 34 cents per share.

    On Tuesday, Benchmark reiterated its buy rating on this company and changed its price target from $60 to $45 a share. If you like to play beaten-down stocks off earnings, then Travelzoo could be for you. The bears have decimated this stock from its July high of $90.80 a share to its current price of just over $29 a share.

    The current short interest as a percentage of the float for Travelzoo is a whopping 55.7%. That means that out of the 5.54 million shares in the tradable float, 4.43 million are sold short by the bears. This is a stock with an extremely low float and massive short interest. Any good news and this stock is going to take off like a rocket ship post-earnings.

    >>5 Tech Stocks Poised for Big Earnings Moves

    From a technical standpoint, the stock is currently trading below both its 50-day and 200-day moving averages, which is bearish. During the past four months, this stock has been stuck in a nasty downtrend with shares mostly printing lower highs and lower lows. That said, the stock recently rebounded off of the $20 level and is now approaching its 50-day moving average of $31.47 a share.

    If you’re bullish on this stock, I would wait until after they report and buy the stock once it breaks out above $32 to $34 a share on strong volume. Watch for volume that’s tracking in close to or above its three-month average action of 1.27 million shares. A high volume move above those levels post-earnings should set this stock up for a run back towards $40 a share or possibly even higher.

    I would only get short this stock after they report if the stock drops below $27.50 a share on big volume. A move below that level should set this name up for a drop back towards $23 a share or possibly even lower if the bears learn on this post-earnings.

    Cepheid

    One more earnings short-squeeze idea is molecular diagnostics company Cepheid (CPHD), which is set to release numbers on Thursday after the market close. Wall Street analysts, on average, expect Cepheid to report revenue of $68.26 million on earnings of 2 cents per share.

    This stock is trending very strong going into the quarter since shares are trading just a few points off its recent 52-week high and all-time high of $42.65.

    The current short interest as a percentage of the float for Cepheid sits at 12.4%. That means that out of the 61.33 million shares in the tradable float, 7.6 million are sold short by the bears. This is a rather high short interest, so watch for a noticeable short-squeeze if the company can deliver what the bulls are looking for.

    From a technical standpoint, the stock is currently trading above both its 50-day and 200-day moving averages, which is bullish. The stock has been in a powerful uptrend since August, where shares have been printing higher lows and higher highs. The stock now is setting up for a big breakout off earnings if they can deliver strong results.

    I would look to be a buyer of this stock after earnings if it can manage to break out above $41 to $42.65 a share on big volume. Look for volume that’s tracking in close to or above its three-month average action of 807,900 shares. Remember, you can also play the breakout in after hours trading if lots of volume is moving into the stock. Or, you can wait for the following trading session to play the stock.

    I would only look to get short CPHD after they report if the stock drops below $37.74 and then below its 50-day moving average of $36.38 a share on heavy volume. A move below those levels should set the stock up to trade down to $34 a share or possibly even lower if the bears hammer this stock post-earnings.

    To see more potential earnings short squeeze candidates, including Acme Packet (APKT), Athenahealth (ATHN) and Rediff.com (REDF), 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.