Stock Quotes in this Article: CPST, KR, SCHS, SFD, 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 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. 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.

Smithfield Foods

My first earnings short-squeeze candidate is consumer goods player Smithfield Foods (SFD), which is set to report results on Thursday before the market open. This company, together with its subsidiaries, produces and markets a range of fresh meat and packaged meat products both domestically and internationally. Wall Street analysts, on average, expect Smithfield Foods to report revenue of $3.27 billion on earnings of 54 cents per share.

During the last quarter, this company beat Wall Street estimates by 2 cents, coming in at a net income of 69 cents a share vs. the estimate of 67 cents a share. This marked the fourth straight quarter of beating estimates for Smithfield Foods. This company is looking to register its fourth-straight revenue of revenue increase this reporting period.

The current short interest as a percentage of the float for Smithfield Foods is notable at 7.5%. That means that out of the 145.44 million shares in the tradable float, 10.91 million shares are sold short by the bears. This is a decent short interest, so if Smithfield Foods can deliver what the bulls are looking for, then this stock could easily move sharply higher post-earnings.

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From a technical perspective, SFD is currently trading below both its 50-day and 200-day moving averages, which is bearish. This stock has been stuck in a nasty downtrend for the past six months, with shares dropping from around $25 to a low of $18.84 a share. During that move lower, SFD has consistently made lower highs and lower lows, which is bearish technical action.

If you’re bullish on SFD, I would wait until after they release earnings and look for long-biased trades if this stock can manage to trigger a break out above some near-term overhead resistance at $20.53 to $20.67 a share with high-volume. Look for volume on that move that’s close to or above its three-month average action of 1,848,900 shares. If we get that action, then SFD could re-test and possibly take out its 200-day moving average of $21.94 a share.

I would simply avoid SFD or look for short-biased trades if after earnings it fails to trigger that breakout, and then drops below some major near-term support at $18.84 a share with high-volume. If we get that action, then SFD will setup to re-test and possibly take out its 52-week low of $17.79 a share.

Winnebago Industries

One potential earnings short-squeeze play in the mobile homes and RVs complex is Winnebago Industries (WGO), which is set to release its numbers on Thursday before the market open. This company is a U.S. manufacturer of recreation vehicles used in leisure travel and outdoor recreation activities. Wall Street analysts, on average, expect Winnebago Industries to report revenue of $164.69 million on earnings of 12 cents per share.

During the last six months, shares of Winnebago Industries have been trending up strong, with shares jumping over 27%. That move now has this stock trading just a few points off its 52-week high of $11.26 a share. A strong report for Winnebago Industries this week and the stock could trigger a near-term breakout trade.

The current short interest as a percentage of the float for Winnebago Industries is rather high at 13.2%. That means that out of the 29.23 million shares in the tradable float, 3.81 million shares are sold short by the bears. This is a high short interest on a stock with a relatively low float. If Winnebago Industries can deliver what the bulls re looking for, then this stock could skyrocket post-earnings.

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From a technical perspective, WGO is currently trading right at its 50-day moving average and below its 200-day moving average, which is neutral trendwise. This stock has been trading sideways for the last three months, between $10.65 on the upside and $8.14 on the downside. A move outside of that trading range should setup the next major trend for WGO.

If you’re in the bull camp on WGO, I would wait until after they report and look for long-biased trades if this stock can manage to trigger a break out above some near-term overhead resistance at $9.25 to $10 a share with high volume. Look for volume on that move that hits near or above its three-month average action of 297,373 shares. If we get that action, then I would add to any long positions once WGO takes out its 52-week high of $10.65 a share with volume.

I would simply avoid WGO or look for short-biased trades if after earnings this stock fails to trigger that breakout, and then drops below that major support at $8.14 a share with heavy volume. If we get that move, then look for WGO to trade below $7 a share if the bears pound this stock lower post-earnings.

Capstone Turbine

Another potential earnings short-squeeze trade in the industrial electrical equipment complex is Capstone Turbine (CPST), which is set to release numbers on Thursday after the market close. This company develops, manufactures, markets, and services turbine generator sets and related parts for use in stationary distributed power generation applications. Wall Street analysts, on average, expect Capstone Turbine to report revenue of $29.93 million on a loss of 2 cents per share.

This company has missed Wall Street estimates for the past two quarters. During the last quarter, it fell short of Wall Street estimates after reporting a net loss of 3 cents per share versus estimates of a loss of 2 cents per share. The quarter before that, Capstone Turbine missed estimates by one cent per share. This company has registered double-digit revenue growth over the past four quarters. Capstone Turbine has averaged year-over-year revenue growth of 37.4% over the last four quarters.

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The current short interest as a percentage of the float for Capstone Turbine is extremely high at 16.5%. That means that out of the 274.36 million shares in the tradable float, 49.01 million shares are sold short by the bears. The bears have also been increasing their bets from the last reporting period by 8.2%, or by about 3.69 million shares.

From a technical perspective, CPST is currently trading below both its 50-day and 200-day moving averages. This stock has been downtrending for the last four months, with shares dropping from a high of $1.53 to a recent low of 93 cents. That low of 93 cents has now marked a near-term double bottom, since buyers have stepped in twice to support the stock at the level during the last two months. If 93 cents can hold as near-term support for CPST, then this stock could manage to rip higher post-earnings.

If you’re bullish on CPST, then I would wait until after they report and look for long-biased trades if this stock can manage to trigger a near-term break out above its 50-day moving average of $1.03, and above its 200-day moving average of $1.10 a share with high-volume. Look for volume on that move that’s near or above its three-month average action of 2,953,060 shares. If we get that action, then CPST could easily hit $1.20 to $1.25 a share or higher if the bulls gain full control of this stock post-earnings.

I would simply avoid CPST if after it reports this stock fails to trigger that breakout, and then drops below that double bottom price point at 93 cents with heavy volume. A high-volume move below 93 cents could easily setup CPST to re-test or take out its 52-week low of 85 cents per share.

Kroger

One potential earnings short-squeeze play in the retail grocery complex is Kroger (KR), which is set to release numbers on Thursday before the market open. This company, together with its subsidiaries, operates as a retailer in the U.S. Kroger also manufactures and processes some of the food for sale in its supermarkets. Wall Street analysts, on average, expect Kroger to report revenue of $29.13 billion on earnings of 73 cents per share.

This company has beaten Wall Street estimates during the last two quarter and it’s coming off a quarter where it topped estimates by one cent, after they reported a profit of 50 cents per share versus a mean estimate of 49 cents per share. Kroger reported a loss in the last quarter, which followed three-straight quarters of profit. The company reported a profit of $196 million in third quarter of the last fiscal year, a profit of $281 million in the second quarter of the last fiscal year and a profit of $432 million in the first quarter or the last fiscal year.

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The current short interest as a percentage of the float for Kroger sits at 2.5%. That means that out of the 526.47 million shares in the tradable float, 13.73 are sold short by the bears. This is far from a huge short interest, but its more than enough bears involved in Kroger to spark a decent short-covering rally if the company can deliver what the bulls are looking for.

From a technical perspective, KR is currently trading below both its 50-day and 200-day moving averages, which is bearish. This stock has been stuck in a nasty downtrend for the past three months, with shares falling from a high of $24.65 to a recent low of $21.29 a share. During that move lower, shares of KR have consistently made lower highs and lower lows, which is bearish technical price action.

If you’re in the bull camp on KR, I would only look for long-biased trades if after they report this stock manages to trade back above both its 50-day moving average at $22.73 and its 200-day moving average at $23.05 a share with high volume. Look for volume on that move that hits near or above its three-month average action of 5.2 million shares. If we get that action, then KR could hit $24 to $24.50 a share post-earnings.

I would simply avoid KR or look for short-biased trades if after earnings the stock fails to sustain a trend above both its 50-day and 200-day, and then drops below some near-term support at $21.29 a share with heavy volume. A move below $21.29 a share will setup KR to trade down towards $20 to $19 a share if the bears hammer this stock post-earnings.

School Specialty

My final earnings short-squeeze play is School Specialty (SCHS), which is set to release numbers on Thursday before the market open. This is an education company serving the pre-kindergarten through twelfth grade market with instructional solutions that address a range of educational needs, from basic school supplies to standards-based curriculum solutions. Wall Street analysts, on average, expect School Specialty to report revenue of $117.40 million on a loss of 91 cents per share.

If you’re looking for a beaten-down small-cap stock heading into its earnings report, then make sure to check out shares of School Specialty. This stock is down around 30% during the last six months, and shares are currently trading very close to its 52-week low of $2.15 a share.

The current short interest as a percentage of the float for School Specialty is extremely high at 23.5%. That means that out of the 14.33 million shares in the tradable float, 3.24 million are sold short by the bears. The bears have also been increasing their bets from the last reporting period by 17.8%, or by about 577,000 shares. This is a low float and high short interest situation. Any bullish news for School Specialty post-earnings could easily lead to a big short-squeeze.

From a technical perspective, SCHS is currently trading below both its 50-day and 200-day moving averages, which is bearish. This stock has been downtending hard for the past three months, with shares dropping from a high of 4.03 to a recent low of $2.40 a share. During that move lower, this stock has consistently made lower highs and lower lows, which is bearish technical price action.

If you’re bullish on SCHS, I would wait until after they report and look for long-biased trades if this stock triggers a move back above its 50-day moving average of $2.99 a share with high-volume. Look for volume on that move that’s near or above its three-month average action of 189,232 shares. If we get that move, then look to add to any long positions in SCHS if it takes out $3.23 to $3.40 a share with volume.

I would simply avoid SCHS after they report earnings if this stock fails to sustain a trend back above its 50-day moving average of $2.99 with strong upside volume flows. A failure to trend above its 50-day will set this stock up to take out its near-term support levels at $2.59 to $2.40 a share, and possibly re-test its 52-week low of $2.15 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.