Stock Quotes in this Article: CBST, CLB, LRCX, MLNX, SCSS

WINDERMERE, Fla. (Stockpickr) -- Short-sellers hate being caught short a stock that produces earnings that please the bulls. 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 – buy only if you have a very strong conviction that the stock is going to rip higher, and its acting technically very bullish.

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

 

Cubist Pharmaceuticals

My first earnings short-squeeze trade idea is biotechnology and drugs player Cubist Pharmaceuticals (CBST), which is set to release its numbers on Wednesday after the market close. Wall Street analysts, on average, expect Cubist Pharmaceuticals to report revenue of $209.42 million on earnings of 44 cents share.

This company missed Wall Street estimates last quarter after beating estimates in the prior two. In the fourth quarter of last year, its profit dropped 53.1% to $6.8 million or 11 cents per share, to $14.6 million or 26 cents per share, from the same period a year ago. Revenue jumped 31.6% to $212.9 million from $161.8 million. Cubist Pharmaceuticals is looking to report its fifth-straight quarter of revenue increases this week.

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The current short interest as a percentage of the float for Cubist Pharmaceuticals is very high at 17.6%. That means that out of the 62.68 million shares in the tradable float, 11.04 million shares are sold short by the bears. The bears have also been increasing their short positions from the last reporting period by 2.6%, or by about 279,000 shares.

From a technical perspective, CBST is currently trading above its 200-day moving average and below its 50-day moving average, which is neutral trendwise. This stock had been in a strong uptrend for the past six months, rising from a low of $34.58 to a recent high of $44.95 a share. That said, after the stock hit that high it has reversed course and broke its uptrend moving back below its 50-day moving average.

If you’re a bull on CBST, I would wait until after its report and look for long-biased trades if this stock can take out some near-term overhead resistance at $41 and move back above its 50-day moving average of $42.39 a share with high volume. Look for volume that’s close to or well above its three-month average volume of 773,652 shares. If we get that action, then this stock could make a run at its 52-week high of $44.95 a share or possibly trend much higher if the bulls gain full control post-earnings.

I would simply avoid CBST or look for short-biased trades if after earnings this stock fails to trade back above $41 to 42.39 a share, and then drops below some near-term support at $39 to $38.50 a share with heavy volume. Target a drop back below its 200-day moving average of $37.93 if those support levels get taken out with volume post-earnings.

Select Comfort

Another potential earnings short-squeeze play is bed manufacturer and retailer Select Comfort (SCSS), which is set to report results on Wednesday after the market close. Wall Street analysts, on average, expect Select Comfort to report revenue of $232.63 million on earnings of 40 cents share.

Shares of Select Comfort are on fire heading into its earnings report with the stock hitting a new 52-week high today at $35.17 a share. This stock has been a monster so far in 2012, with shares already up over 60%. A strong earnings report and bullish forward guidance could easily spark a monster short-squeeze for Select Comfort post-earnings.

The current short interest as a percentage of the float for Select Comfort stands at 8.5%. That means that out of the 53.67 million shares in the tradable float, 4.91 million shares are sold short by the bears. This is a decent short interest on a stock with a relatively low float.

From a technical perspective, SCSS 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 six months, with shares soaring from a low of $17.78 to a recent high of $35.17 a share. During that uptrend, SCSS has consistently made higher lows and higher highs, which is bullish technical price action. Now this stock is starting to trigger breakout trade with share taking out some near-term overheard resistance at $34.19 a share.

If you’re bullish on SCSS, I would wait until after its report and look for long-biased trades if the stock breaks out to a new 52-week high with heavy volume. Look for volume on that move that’s near or well above its three-month average action of 1,062,140 shares. If we get that action, then look for SCSS to make a run at $40 or higher if the bulls gain full control of this stock post-earnings.

I would simply avoid SCSS or look for short-biased trades if after earnings that breakout never hits, and then the stock drops back below some near-term support at $33 with heavy volume. If we get that move, look for SCCS to drop back towards its 50-day moving average of $30.93 or possibly lower if the bears hammer this down post-earnings.

Select Comfort shows up on a recent list of 4 Stocks That Are Real Sleepers in 2012.

Lam Research

Another potential earnings short-squeeze trade is semiconductor player Lam Research (LRCX), which is set to release numbers on Wednesday after the market close. This is a supplier of wafer fabrication equipment and services to the worldwide semiconductor industry. Wall Street analysts, on average, expect Lam Research to report revenue of $643.07 million on earnings of 46 cents per share.

The current short interest as a percentage of the float for Lam Research is extremely high at 18.3%. That means that out of the 119.02 million shares in the tradable float, 21.72 million are sold short by the bears. The bears have also been increasing their short positions from the last reporting period by 8.8%, or by about 1.75 million shares. If the bears are caught leaning too strong into this quarter and LCRX delivers what the bulls are looking for, then this stock could easily see a sizable short-covering rally.

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From a technical perspective, LRCX is currently trading above both its 50-day and 200-day moving averages, which is bullish. This stock has just started to move back above its 50-day moving average of $42.44 today. That move is quickly pushing LRCX within range of triggering a near-term breakout trade post-earnings.

If you like the look of LRCX here, then I would wait until after it reports earnings and look for long biased trades if this stock can break out above some near-term overhead resistance at $43.57 to $45.48 a share with high-volume. Look for volume on that move that registers close to or above its three-month average action of 3.5 million shares. If we get that move, then look for LRCX to make a run at $50 a share or possibly higher if the bulls spark a short-squeeze.

I would avoid LRCX or look for short-biased trades if the stock fails to trigger that breakout, and then drops back below its 200-day moving average of $40.81 with high volume. Target a drop toward $38 a share or possibly much lower if the bears spark a notable selloff post-earnings.

Lam Research, one of Moore Capital's holdings, shows up on a list of 5 Tech Stocks Investors Don't Know About.

Core Laboratories

An earnings short-squeeze candidate in the oil well services and equipment space is Core Laboratories (CLB), which is set to release numbers on Wednesday after the market close. This is a provider of reservoir description, production enhancement and reservoir management services to the oil and gas industry. Wall Street analysts, on average, expect Core Laboratories to report revenue of $238.28 million on earnings of $1.06 per share.

Core Laboratories is another strong-trending stock heading into its earnings report this week. This stock is currently trading just a few points off its 52-week high of $135.92 a share, and shares are up over 15% so far in 2012. This strong move has pushed the stock within range of triggering a near-term breakout trade post-earnings.

The current short interest as a percentage of the float for Core Laboratories stands at 8.6%. That means that out of the 46.62 million shares in the tradable float, 4.03 million are sold short by the bears. This stock has a low float and a pretty decent short interest. Any bullish earnings news could easily spark a profitable short-squeeze trade.

From a technical perspective, CLB is currently trading above both its 50-day and 200-day moving averages, which is bullish. This stock has been u trending strong for the past six months, with shares spiking higher from a low of $103.39 to a recent high of $135.95 a share. During that up-move, CLB has consistently made higher lows and higher highs, which is bullish technical price action. Now CLB is positioned to trigger a breakout after its earnings report if the company can deliver what the bulls are looking for.

If you’re bullish on CLB, I would look for long-biased trades after its report if this stock manages to break out above some near-term overhead resistance at $135.95 a share with high-volume. Look for volume on that move that’s near or well above its three-month average action of 405,144 shares. If we get that action, then CLB should trade to up towards $140 to $150 a share post-earnings.

I would simply avoid CLB or look for short-biased trades if the stock fails to trigger that breakout, and then drops back below some near-term support at $130 a share with high-volume. Target a drop back towards its 50-day moving average of $126.74 a share or possibly much lower if the bears whack this stock down post-earnings.

Core Labs shows up on a list of 5 Stocks That Can Offset Pain at Pump.

Mellanox Technologies

My final earnings short-squeeze candidate is semiconductors player Mellanox Technologies (MLNX), which is set to release numbers on Wednesday after the market close. This company produces and supplies interconnect products for computing, storage, and communication applications in the computing, Web 2.0, storage, financial services, database, and cloud markets. Wall Street analysts, on average, expect Mellanox to report revenue of $81.58 million on earnings of 34 cents per share.

If you’re looking for a strong uptrending stock that’s already triggering a near-term breakout heading into its earnings, then make sure to check out shares of Mellanox Technologies. This stock is printing a new 52-week high today at $43.93 a share, and it’s up over 30% so far in 2012.

The current short interest as a percentage of the float for Mellanox sits at 6.9%. That means that out of the 30.68 million shares in the tradable float, 2 million shares are sold short by the bears. The bears have also been increasing their bets from the last reporting period by 5.6%, or by about 105,000 shares. This stock has a decent short interest and a low float. Plus the bears are pressing a bit heading into the quarter. This is a great recipe for a monster short-squeeze as long as MLNX delivers what the bulls are looking for.

From a technical perspective, MLNX 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 couple of months and change, with shares rising from $30 to today’s high of $43.92 a share. This stock has started to trigger a near-term breakout trade today with shares moving above some near-term overhead resistance at $42.50 a share.

If you’re a bull on MLNX, I would wait until after its report and look for long-biased trades if the stock breaks out to a new 52-week high above $43.92 a share with high volume. Look for volume on that move that’s near or well above its three-month average action of 272,479 shares. If we get that action, look for MLNX to make a run at $50 a share or possibly higher post-earnings.

I would simply avoid MLNX or look for short biased trades if it fails to print a new 52-week high, and then sells off with heavy volume below some near-term support at $41 a share. If we get that action, look for MLNX to drop back towards its 50-day moving average of $38.95 a share or possibly much lower if the bears spark a sizeable selloff 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.