Stock Quotes in this Article: JDSU, MIPS, SPLS, GRPN, KORS

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.

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.

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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 -- but 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.

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.

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

Michael Kors

My first earnings short-squeeze trade idea today is apparel and accessories maker Michael Kors (KORS), which is set to report results on Tuesday before the market open. This company engages in the design, marketing, distribution, and retail of branded women’s apparel and accessories, and men’s apparel. Wall Street analysts, on average, expect Michael Kors to report revenue of $367.96 million on earnings of 20 cents per share.

Just this morning, Barclays initiated coverage on shares of Michael Kors with an overweight rating. This company has met or beaten Wall Street estimates during the last two quarters. In the last quarter, the company reported earnings per share of 22 cents, vs. estimates of 16 cents per share.

The current short interest as a percentage of the float for Michael Kors is notable at 3.1%. That means that out of the 115.22 million shares in the tradable float, 3.49 million shares are sold short by the bears. This isn’t a huge short interest, but it’s more than enough to spark a tradable short-squeeze if KORS can deliver the earnings news the bulls are looking for.

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From a technical perspective, KORS is currently trading just above its 50-day moving average, which is bullish. This stock has been stuck in a sideways trading pattern for the past three months, with shares moving between $35.50 and $45.20 a share. A move outside of that range post-earnings will likely setup the next major trend for KORS.

If you’re bullish on KORS, then I would wait until after they report and look for long-biased trades if this stock can manage to take out $45.20 a share with high volume. Look for volume on that move that hits near or above its three-month average action of 3,062,180 shares. If we get that move, then look for KORS to re-test or possibly take out its next major overhead resistance level of $49.50 a share post-earnings.

I would simply avoid KORS or look for short-biased trades if after earnings it fails to trigger that move, and then drops some near-term support at $39 a share with heavy volume. If we get that move, then look for KORS to re-test and possibly take out its next major support levels at $37.77 to $35.50 a share.

Groupon

Another earnings short-squeeze play is daily deals player Groupon (GRPN), which is set to release its numbers on Monday after the market close. This company is a local e-commerce marketplace that connects merchants to consumers by offering goods and services at a discount. Wall Street analysts, on average, expect Groupon to report revenue of $573.13 million on earnings of 3 cents per share.

In a note to clients last Friday, Morgan Stanley analyst Scott Devitt reiterated his bullish overweight rating on the stock, writing that he expects an in-line or better quarter. Devitt said shares of Groupon have been selling off recently because of negative sentiment on long duration stories, confusion around accounting for goods, and the lock-up expiration. He reiterated his price target on the stock at $17.

The current short interest as a percentage of the float for Groupon is extremely high at 26.3%. That means that out of the 225.79 million shares in the tradable float, 55.22 million shares are sold short by the bears. The bears have also been increasing their bets dramatically from the last reporting period by 46%, or by about 17.38 million shares. If the bears are caught leaning too hard into this quarter, then we could easily see an explosive short squeeze develop post-earnings.

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From a technical perspective, GRPN is currently trading below its 50-day moving average, which is bearish. This stock has been stuck in a nasty downtrend for the last six months, with shares plunging from around $19 to its recent low of $6.35 a share. During that sharp move lower, shares of GRPN have consistently made lower highs and lower lows, which is bearish technical price action.

If you’re in the bull camp on GRPN, then I would wait until after they report and look for long-biased trades if this stock triggers a breakout above some near-term overhead resistance levels at $8.16 a share, and then above its 50-day moving average of $8.59 a share with high volume. Look for volume on that move that registers near or above its three-month average action of 8,249,890 shares. If we get that move, then GRPN could easily re-test or possibly take out its next significant overhead resistance levels at $10.67 to $11.39 a share, or even $12.43 a share.

I would simply avoid GRPN or look for short-biased trades if after earnings this stock fails to trigger that breakout, and then moves back below some key near-term support levels at $6.59 to $6.35 a share with heavy volume. If we get that move, then GRPN could be in for a sharp decline since the stock will enter new 52-week-low territory below $6.35 a share.

For another take on Groupon, it was also featured recently in "5 Social Networking Stocks to Sell Now."

JDS Uniphase

One potential earnings short-squeeze trade is communications equipment maker JDS Uniphase (JDSU), which is set to release numbers on Tuesday after the market close. This company is a provider of communications test and measurement solutions and optical products for telecommunications service providers, wireless operators, cable operators, and network equipment manufacturers. Wall Street analysts, on average, expect JDS Uniphase to report revenue of $423.18 million on earnings of 12 cents per share.

During the last quarter, this company missed Wall Street estimates by 2 cents, after it reported a net income of 5 cents per share vs. Wall Street estimates of 7 cents per share. JDS Uniphase topped Wall Street estimates in the second quarter.

Just this morning, Goldman Sachs Group issued a new buying rating on shares of JDS Uniphase with a $14 a share price target. Goldman said the company should see increased customer spending in the second half of the year.

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The current short interest as a percentage of the float for JDS Uniphase sits at 4.2%. That means that out of the 230.93 million shares in the tradable float, 9.43 million shares are sold short by the bears.

From a technical perspective, JDSU is currently trading above its 50-day moving average and below its 200-day moving average, which his neutral trendwise. This stock has been trading within a range for the past two months, with shares moving between $8.47 on the downside and $11.30 on the upside. A move outside of that range post-earnings should setup the next major trend for JDSU.

If you’re bullish on JDSU, then I would wait until after they report and look for long-biased trades if this stock can manage to break out above some near-term overhead resistance at $11.30 a share, and then above its 200-day moving average of $11.59 a share with high volume. Look for volume on that move that hits near or above its three-month average action of 4,977,950 shares. If we get that move, then look for JDSU to re-test or possibly take out its next major overhead resistance level at $13.55 a share.

I would avoid JDSU or look for short-biased trades if after earnings it fails to trigger that breakout, and then drops below its 50-day moving average of $10.02 a share with heavy volume. If we get that action, then JDSU will likely re-test or possibly take out its next major support levels at $9.33 to $8.47 a share post-earnings.

Staples

Another possible earnings short-squeeze trade is office supplies player Staples (SPLS), which is set to release numbers on Wednesday before the market open. This is an office products company. Wall Street analysts, on average, expect Staples to report revenue of $5.73 billion on earnings of 22 cents per share.

During the last quarter, this company reported net income of 30 cents per share, which was in-line with the average Wall Street estimate. That marked the third straight quarter that Staples has met Wall Street estimates. This company is looking to improve from a profit drop last quarter that snapped a positive streak of results.

The current short interest as a percentage of the float for Staples is rather high at 8.7%. That means that out of the 683.50 million shares in the tradable float, 59.38 million shares are sold short by the bears. The bears have also been increasing their bets from the last reporting period by 15.6%, or by about 8 million shares. If the bears are caught leaning too hard into this quarter, then we could easily see a decent short-covering rally post-earnings.

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From a technical perspective, SPLS is currently trading above its 50-day moving average and below its 200-day moving average, which is neutral trendwise. This stock has been trading range bound for the last three months, with shares moving between $12.10 on the downside and $13.70 on the upside. A move outside of that range post-earnings will likely setup the next major trend for SPLS.

If you’re in the bull camp on SPLS, then I would look for long-biased trades after earnings if this stock manages to trigger a near-term break out above some overhead resistance levels at $13.49 to $13.70 a share with high volume. Look for volume on that move that hits near or above its three-month average action of 11,087,900 shares. If we get that move, then look for SPLS to re-test and possibly take out its next major overhead resistance level at $14.38 a share.

I would simply avoid SPLS or look for short-biased trades after earnings the stock fails to trigger that breakout, and then moves back below some near-term support at its 50-day moving average of $12.78 a share with high volume. If we see that move, then SPLS will setup to re-test or possibly take out its next major support level at $12.10 a share post-earnings.

MIPS Technologies

My final earnings short-squeeze play today is semiconductor stock MIPS Technologies (MIPS), which is set to release numbers on Wednesday after the market close. This company is a provider of industry-standard processor architectures and cores for digital home, networking and mobile applications. Wall Street analysts, on average, expect MIPS Technologies to report revenues of $14 million on a loss of 6 cents per share.

If you’re looking for a strong uptrending stock with a decent short interest heading into its earnings report this week, then make sure to check out shares of MIPS Technologies. This stock has skyrocketed so far in 2012, with shares up over 45%. This stock is currently trading just one point off its 52-week high of $7.38 a share.

The current short interest as a percentage of the float for MIPS Technologies stands at 6.6%. That means that out of the 48.17 million shares in the tradable float, 3.52 million are sold short by the bears. This is a decent short interest on a stock with a relatively low float. Any bullish earnings news from MIPS could easily send this stock soaring post-earnings.

From a technical perspective, MIPS is currently trading above both its 50-day and 200-day moving averages, which is bullish. This stock has been trending range bound for the last four months, with shares moving between $5.82 and $7.38 a share. A move outside of that range post-earnings will likely setup the next major trend for MIPS.

If you’re bullish on MIPS, then I would wait until after they report earnings and look for long-biased trades if it can manage to trigger a breakout trade above some near-term overhead resistance at $6.95 to $7.14 a share, and then above $7.38 a share with high volume. If we get that action, then MIPS has a great chance of re-testing and possibly taking out its next major overhead resistance level at $8.27 a share.

I would simply avoid MIPS after earnings if it fails to trigger that breakout, and then moves back below its 50-day moving average of $6.43 with heavy volume. If we get that move, then look for MIPS to re-test and possibly take out its 200-day moving average of $5.79 a share 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.