Stock Quotes in this Article: INCY, NIHD, REGN, DNKN, GNC

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 – 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.

GNC

My first earnings short-squeeze trade candidate is specialty retailer of nutritional supplements GNC (GNC), which is set to release its numbers on Wednesday before the market open. Wall Street analysts, on average, expect GNC to report revenue of $586.97 million on earnings of 52 cents share.

Shares of GNC are trending very strong heading into its earnings report, with the stock printing a brand new all-time high this morning. This specialty health and nutrition products player has grown its earnings 26%, 37% and 64% in the past three years. Revenue grew at 3%, 7% and 14% during the same timeframe. Return on equity was 20% last year, which was up for the third year in a row.

The current short interest as a percentage of the float for GNC stands at 4.1%. That means that out of the 90.74 million shares in the tradable float, 4.38 million shares are sold short by the bears. This isn’t a huge short interest, but it’s more than enough to spark a sizeable short-squeeze if GNC can deliver what the bulls are looking for.

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From a technical perspective, GNC is currently trading above both its 50-day and 200-day moving averages, which is bullish. This stock has been uptrending crazy strong for the past six months, with shares soaring from a low of $23.83 to brand new highs above $36 a share. This move has also pushed GNC into breakout territory with shares now moving above some near-term overhead resistance at $36.10.

If you’re bullish on GNC, I would wait until after its report and look for long-biased trades if this stock prints a new all-time high on high-volume. Look for volume that’s close to or well above its three-month average volume of 1,560,050 shares. If we get that action, then this stock has a great chance of hitting $40 to $45 a share post-earnings.

I would simply avoid GNC or look for short-biased trades if after earnings this stock fails to make a new high, and then drops below its 50-day moving average of $33.59 with heavy volume. Target a drop back towards some near-term support at $31 a share or possibly lower if the bears hammer this stock down post-earnings.

Dunkin Brands Group

One potential earnings short-squeeze play in the recreational products complex is Dunkin Brands Group (DNKN), which is set to report results on Thursday before the market open. This is a franchisor of restaurants serving coffee and baked goods, as well as ice cream within the quick service restaurant segment of the restaurant industry. Wall Street analysts, on average, expect Dunkin Brands Group to report revenue of $148.53 million on earnings of 23 cents share.

Dunkin Brands Group has seen its earnings jump 30% and 36% in the past two quarters on revenue gains of 9% and 13%. Wall Street is looking for earnings per share growth of 188% in the first quarter and 45% for the entire year. After-tax margin in the past two quarters hit record highs at 19.2% and 21.5%.

The current short interest as a percentage of the float for Dunkin Brands Group sits at 9.1%. That means that out of the 82.35 million shares in the tradable float, 7.47 million shares are sold short by the bears. This is a decent short interest on a stock with a relatively low float. If Dunkin Brands Group can report strong earnings and issue bullish forward guidance, then this stock is has a great chance of seeing a monster short-squeeze.

From a technical perspective, DNKN is currently trading above both its 50-day and 200-day moving averages, which is bullish. This stock has been on a tear for the past six months, with shares exploding higher from a low of $23.24 to a recent high of $32.44 a share. That move has now pushed the stock within range of trigging a major breakout trade post-earnings.

If you’re a bull on DNKN, I would wait until after its report and look for long-biased trades if the stock breaks out above some near-term overhead resistance at $32.15 to $32.44 a share with heavy volume. Look for volume on that move that’s near or well above its three-month average volume of 1.25 million shares. If we get that action, then look for DNKN to start a run towards $40 a share post-earnings if the bulls gain full control of this stock. Keep in mind that DNKN will be trading in all-time territory if it takes out $32.44.

I would simply avoid DNKN or look for short-biased trades if after earnings that breakout never triggers, and then the stock drops back below its 50-day moving average of $30.29 a share with heavy volume. If we get that move, look for DNKN to trade down towards $29 to $27 a share if the bears spark a notable selloff post-earnings.

Dunkin Brands also shows up on a list of 5 Stocks That Could Be Trampled and was one of 10 Best New Stock Ideas by Steven Cohen in the most recently reported quarter.

Incyte

Another potential earnings short-squeeze play in the biotechnology and drugs complex is Incyte (INCY), which is set to release numbers on Thursday before the market open. This company is focused on the discovery, development and commercialization of small molecule drugs to treat serious unmet medical needs. Wall Street analysts, on average, expect Incyte to report revenue of $25.17 million on a loss of 46 cents per share.

Shares of Incyte are trending pretty strong heading into its earnings report, with the stock trading a few points off its 52-week high of $21.15 a share. So far in 2012 this stock has racked up gains of over 20%. The current short interest as a percentage of the float for Incyte is rather high at 12.7%. That means that out of the 125.83 million shares in the tradable float, 15.85 million are sold short by the bears.

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From a technical perspective, INCY is currently trading above both its 50-day and 200-day moving averages, which is bullish. This stock has racked up a monster move during the last six months, with shares advancing from a low of $11.76 to a recent high of $20.60 a share. That move has now pushed the stock within range of triggering a near-term breakout trade post-earnings if the company can deliver what the bulls are looking for.

If you like the look of INCY 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 $19.50 to $20.60 a share with high-volume. Look for volume on that move that registers close to or above its three-month average action of 1,498,810 shares. If we get that move, then look for INCY to take out its 52-week high of $21.15 a share and trend much higher.

I would avoid INCY or look for short-biased trades if the stock fails to trigger that breakout and then drops back below its 50-day moving average of $18.06 and some near-term support at $17.08 a share with high-volume. Target a drop back towards its 200-day moving average of $15.96 a share or possibly much lower if the bears push this stock down post-earnings.

NII

An earnings short-squeeze play in the communications services sector is NII Holdings (NIHD), which is set to release numbers on Thursday before the market open. This company, through its subsidiaries, provides wireless communication services under the Nextel brand name to businesses and individuals in Mexico, Brazil, Argentina, Peru, and Chile. Wall Street analysts, on average, expect NII Holdings to report revenue of $1.69 billion on earnings of 24 cents per share.

If you’re looking for a heavily-shorted beaten-down stock heading into its earnings report, then make sure to check out shares of NII Holdings. Over the last year, shares of NII Holdings have plunged by over 52%, and so far in 2012 it’s down around 8.6%.

The current short interest as a percentage of the float for NII is notable at 7.9%. That means that out of the 167.19 million shares in the tradable float, 13.24 million are sold short by the bears. The bears have also been increasing their bets from the last reporting period by 6.9%, or by about 858,000 shares. If the bears are caught learning too hard into this quarter, then we could easily see a sizeable short-squeeze get setoff.

From a technical perspective, NIHD is currently above its 50-day moving average and below its 200-day moving average, which is neutral trendwise. This stock just got crushed in late February from $24.32 to a recent low of $15.88 a share. After printing that low, NIHD has started to uptrend and move back above its 50-day moving average of $18.95 a share. During that uptrend, shares of NIHD have started to make higher lows and higher highs, which is bullish technical price action.

If you’re bullish on NIHD, I would look for long-biased trades after it reports earnings if this stock manages to break out above some near-term overhead resistance at $19.63 to $20 a share with high-volume. Look for volume on that move that’s near or well above its three-month average volume of 3,357,120 shares. If we get that action, then NIHD could easily make a run back towards its February high of $24.32 a share.

I would simply avoid NIHD or look for short-biased trades if the stock fails to trigger that breakout, and then drops back below its 50-day moving average of $18.95 a share with high-volume. Target a drop back towards $17.36 to $16 a share if the bears whack this stock lower post-earnings.

NII, one of Tudor Investment's holdings, shows up on a list of Telecom Stocks Bought and Sold by Hedge Funds for the most recently reported quarter and was one of 10 Top Morningstar M&A Stock Picks for 2012.

Regeneron Pharmaceuticals

My final earnings short-squeeze candidate is biotechnology and drugs player Regeneron Pharmaceuticals (REGN), which is set to release numbers on Thursday before the market open. Wall Street analysts, on average, expect Regeneron to report revenue of $172.41 million on a loss of 24 cents per share.

On Monday, Bank of America analysts raised their price target on Regeneron from $135 to $146 a share. The analysts wrote, “We raised our peak Eylea penetration and revenue estimates in wet AMD following a survey of 75 ophthalmologists, which indicated 30% and 15% of Lucentis and Avastin users would be switched to Eylea in 12 months.”

The current short interest as a percentage of the float for Regeneron Pharmaceuticals sits at 6.9%. That means that out of the 71.44 million shares in the tradable float, 5.01 million shares are sold short by the bears. This stock has a reasonably low float and high short-interest. If Regeneron can beat earnings estimates and guide higher, then this stock could explode to the upside post-earnings.

From a technical perspective, REGN is currently trading above both its 50-day and 200-day moving averages, which is bullish. This stock has exploded higher in the last six months, with shares rising from a low of $49.58 to a recent high of $128 a share. That move has now pushed the stock within range of triggering a breakout to all-time high levels post-earnings.

If you’re bullish on REGN, I would wait until after its report and look for long-biased trades if the stock breaks out above $128 a share with high-volume. Look for volume on that move that’s near or well above its three-month average action of 1,024,060 shares. If we get that action, look for REGN to rip higher towards $135 to $145 post-earnings if the bulls gain full control of this stock.

I would simply avoid REGN or look for short-biased trades if it fails to print a new all-time high above $128, and then drops below some near-term support at $122.16 to $120 a share with heavy volume. If we get that action, look for REGN to drop back towards its 50-day moving average of $114.27 a share or possibly lower if the bears hammer this stock down 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.