Stock Quotes in this Article: AIR, HELE, HITK, OCZ, PSMT

WINDERMERE, Fla. (Stockpickr) -- News events have the power to create massive volatility in stocks, and the one event that can move them substantially higher or lower is an earnings release. Take that one step further and combine a bullish earnings report with a stock that’s heavily shorted, and all of a sudden you have the fuel that can ignite a large short squeeze.

Short-sellers hate being caught short a stock that produces earnings that please the bulls on Wall Street. When this happens, we often see tradable short squeezes develop as the bear rush to cover their positions and avoid even bigger losses. Even the best short-sellers know that it’s never a good idea to stay short once a big short-covering rally starts that’s sparked by an earnings event.

This is precisely why I search 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 manage your risk accordingly. Sometimes the best play is to wait for the stock to breakout following the report before you jump in to profit from off a short squeeze. When you do this you’re letting the trend emerge after the market has digested all of the news.

    However, sometimes the stock is going to be in such high demand that you will miss a lot of the move. That’s why it’s only worth betting prior to the report if you have a very strong conviction that the stock is going to explode higher.

    Here’s a look at a number of stocks that could experience big short squeezes when they report earnings this week.

    OCZ Technology Group

    My first earnings short-squeeze candidate is OCZ Technology Group (OCZ), which is set to report its results on Wednesday after the market close. This company is a provider of high-performance solid state drives and memory modules for computing devices and systems. Wall Street analysts, on average, expect OCZ to report revenue of $69.43 million on a loss of 1 cent per share.

    OCZ Technology Group is my favorite earnings short-squeeze trade right now. One of the big reasons I like this play is because Steven Cohen’s famous hedge fund SAC Capital recently increased its position in OCZ to a 5.1% ownership stake, or 2.6 million shares. This new position initiated on June 7 was a massive increase from SAC's previous 9,784 shares of OCZ. If Cohen’s timing is right in front of the quarter, then this stock could be coiling for a big short squeeze.

    The current short interest as a percentage of the float for OCZ is a massive 27.9%. That means that out of the 47.53 million shares in the tradable float, 13.26 million are sold short by the bears. This is a huge short position and the bears have been adding to that position recently, the short-sellers have increased their bets by 3.7%, or by around 471,000 shares from the last reporting period. If the bears are caught leaning the wrong way on this stock, then we could see a big short squeeze.

    From a technical standpoint, shares of OCZ have recently dropped big from its 52-week high of $10.48 a share to a recent low of $6.37 a share. Since that deep slide, the stock has rebound and is now trading sideways between $8.50 and $7.80 a share. This sideways action sets up a defined earnings trade since a break either way is going to push the stock into its next trend phase.

    The way I would play OCZ is to wait for the company to report and then to buy the stock aggressively if you see shares trade above $8.50 to $8.63 on heavy volume. I would add to any long position if you see the stock take out $9 a share following the report. I would only short this stock if you see it drop below $7.80 and then below the 50-day moving average of $7.63 on big volume after it reports earnings.

    Hi-Tech Pharmacal

    Another potential earnings short-squeeze play is Hi-Tech Pharmacal (HITK), which is set to report results on Thursday before the open. This company is a specialty manufacturer and marketer of prescription, over-the-counter and nutritional products. Wall Street analysts, on average, expect Hi-Tech to report revenues of $49.33 million on earnings of 71 cents per share.

    This stock is trending very strong going into the quarter with shares trading very close to 52-week highs at around $29 a share. This strong momentum could mean that a big earnings short squeeze is setting up here.

    The current short interest as a percentage of the float for HITK is a rather large 12.2%. That means that out of the 9.94 million shares in the tradable float, 1.23 million are sold short by the bears. This is a very high short interest on a stock with an incredibly low float. This is the exact type of situation that could produce big short covering that pushes the stock significantly higher. It’s also worth noting that the bears have been increasing their bets from the last reporting period by 6.4%, or by about 74,000 shares.

    From a technical standpoint, shares of HITK recently broke out above some past overhead resistance at around $29.17 to $29.89 a share. This breakout took the stock above three-year highs of $29.89, which is an extremely bullish technical development. Some strong volume flows were seen on HITK as the stock approached and broke out to those new highs last week.

    The way I would play this stock is to wait until they report and buy it aggressively if you see a big volume move through the 52-week high of $30.02 a share. Since the float here is so low, this could easily squeeze big on any bullish news. I would simply get out of this trade or short the stock if you see it fail to hold the recent breakout and trade back below $29.17 a share on heavy volume following the earnings release.

    Hi-Tech shows up on a recent list of 10 Small-Cap Value Stocks.

    Helen of Troy

    One earning short-squeeze play that could be ripe for a big move is Helen of Troy (HELE), which is set to release numbers on Thursday before the market open. This company is a global designer, developer, importer and distributor of a portfolio of consumer products. Wall Street analysts, on average, expect Helen of Troy to report revenues of $260.20 million on earnings of 76 cents per share.

    This company has seen profits rise year-over-year by an average of 32.5%. Revenue has been trending up for the last three consecutive quarters, and the company is on tap to beat analysts’ expectations for the fifth consecutive quarter. During the last quarter, Helen of Troy beat estimates by 17 cents, after they reported net income of 81 cents per share vs. Wall Street estimates of 64 cents per share.

    The current short interest as a percentage of the float for HELE sits at 4.1%. That means that out of the 28.93 million shares in the tradable float, 1.17 million are sold short by the bears. It’s worth pointing out that the bears have been increasing their bets from the last reporting period by around 6.7%, or by about 73,000 shares.

    From a technical standpoint, this stock just recently broke out above some major past overhead resistance at $33.63 a share. The stock is now trading very close to new 52-week highs, which is a very bullish technical sign.

    The way I would play this name into the quarter, is to wait for the company to report and then buy the stock aggressively if you see it print new 52-week highs above $35.39 a share on heavy volume. Look for volume following the report that’s well above the three-month average action of 172,000 shares. I would only get short this name on a volume break below $34.50 after the report.

    Helen of Troy, one of TheStreet Ratings' top-rated household durable goods stocks, also shows up on this list of 3 Earnings Trades for the Week.

    PriceSmart

    If you’re looking for an earnings short squeeze play in the retail sector, then take a look at PriceSmart (PSMT), which is set to release numbers on Thursday before the market open. This company’s business consists primarily of international membership shopping warehouse clubs similar to warehouse clubs in the U.S. Wall Street analysts, on average, expect PriceSmart to report revenue of $390.60 million on earnings of 46 cents per share.

    Shares of PriceSmart are acting extremely strong heading into the quarter since the stock just recently broke out above some past resistance at around $47.80 a share. The stock is also trading near a new 52-week high. Clearly, investors are bidding this name up into the quarter because they expect to see a bullish report.

    The current short interest as a percentage of the float for PSMT is a rather large 10.7%. That means that out of the 18.16 million shares in the tradable float, 1.92 million are sold short by the bears. This is a very small float with a notable short interest. This is the type of situation that can produce a large short squeeze if the bulls like what they hear.

    From a technical standpoint, PSMT is a bit over extended since the relative strength indicator (RSI) is now showing a 77.76 reading. This simply means that the stock is trading at the upper end of a reliable momentum indicator. The stock is overbought by the RSI measure, but that doesn’t mean it still can’t trade much higher.

    Since there are so many shorts in this name, and since the stock has such a low tradable float, it could still see a decent short squeeze even from these overbought levels. One could simply buy this stock following the quarter if you see strong volume move in and the stock takes out its 52-week high of $54.72 a share. I would only get short below $53.50 since that would most likely mean the stock is going to sell off hard.

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

    AAR

    One more stock that could see an earnings inspired short squeeze is AAR (AIR), which is set to release numbers on Wednesday after the market close. This company is a diversified provider of products and services to the worldwide aviation and government and defense markets. Wall Street analysts, on average, expect AAR to report revenues of $459.11 million on earnings of 46 cents per share.

    If AAR beats for the coming quarter, it will mark the fifth consecutive time the company has topped analyst expectations. AAR’s profits have gone up year-over-year by an average of 23.9%. Revenue has been on the rise now for three straight quarters. AAR is coming off of a very strong third quarter in which the company reported a 74.3% jump in net income from continuing operations to $18.3 million, or 45 cents per share. Due to these trends, this quarter should be a strong one for AAR.

    The current short interest as a percentage of the float for AAR is reasonable 7.5%. That means that out of the 36.47 million shares in the tradable float, 2.83 million are sold short by the bears. It’s worth noting that the bears have been increasing their bets from the last reporting period by 3.4%, or by around 91,907 shares.

    From a technical standpoint, shares of AAR have recently bounced off its 50-day moving average of $25.95 and are now trading near $28.50 a share. This stock is quickly approaching a major breakout if it can manage to trade above $28.96 a share.

    I would play this earnings short squeeze candidate by buying the breakout if it happens post-earnings. If you see $29 a share print on heavy volume that’s either close to or well above the three-month average volume of 210,000 shares, then I would be an aggressive buyer of the stock. Remember, if AAR breaks out it will push the stock into new 52-week high territory which is a very bullish technical sign.

    AAR, one of the top-yielding aerospace defense stocks, is one of the top holdings of Schneider Capital Management and Westport Asset Management.

    To see more potential earnings short squeeze candidates, including Zep (ZEP), International Speedway (ISCA) and Miller Petroleum (MILL), 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.