Stock Quotes in this Article: MAKO, SGEN, VSI, SZYM, TNGO

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.

Mako Surgical

My first earnings short-squeeze idea today is medical equipment and supplies player Mako Surgical (MAKO), which is set to release its numbers on Monday after the market close. This is a medical device company that markets its robotic arm solution and orthopedic implants for orthopedic procedures called MAKOplasty. Wall Street analysts, on average, expect Mako Surgical to report revenue of $23.75 million on a loss of 20 cents share.

If you’re looking for a heavily-shorted stock that’s trending very strong heading into its quarter, then take a look at shares of Mako Surgical. This stock has racked up gains of 55% so far in 2012, and shares are trading just six points off its 52-week high of $45.15 a share.

The current short interest as a percentage of the float for Mako Surgical is extremely high at 35.9%. That means that out of the 37.77 million shares in the tradable float, 11.94 million shares are sold short by the bears. This is a huge short interest on a stock with a very low float. If Mako Surgical beats earnings and raises its forward guidance, then this stock could easily spike big-time post-earnings as the shorts rush to cover some of their bets.

From a technical perspective, Mako is currently trading below its 50-day moving average and above its 200-day moving average, which is neutral trendwise. This stock had been uptrending strong for the past six months, with shares ripping higher from a low of $24.40 to a recent high of $45.15 a share. That said, since hitting $45.15 the stock has run into heavy resistance at around $43 to $42 a share, and it has now dropped back below its 50-day moving average of $40.59 a share.

If you’re bullish on MAKO, I would wait until after its report and look for long-biased trades if this stock can manage to trigger a break out back above its 50-day and then above $45.15 a share with high volume. Look for volume on that move that registers close to or well above its three-month average action of 921365 shares. If we get that action, then look for MAKO to tag $50 to $55 a share post-earnings.

I would simply avoid MAKO or look for short-biased trades if after earnings this stock fails to move back above its 50-day, and then drops back below its 200-day moving average of $34.96 a share with heavy volume. Target a drop down to $32 to $28 a share if the bears whack this stock lower post-earnings.

Mako Surgical shows up on a list of 10 Small-Cap Stocks Poised to Rise, History Shows.

Vitamin Shoppe

A potential earnings short-squeeze play in the computer services complex is Vitamin Shoppe (VSI), which is set to report results on Tuesday before the market open. This is a specialty retailer and direct marketer of vitamins, minerals, herbs, specialty supplements, sports nutrition and other health and wellness products. Wall Street analysts, on average, expect Vitamin Shoppe to report revenue of $239.71 million on earnings of 57 cents per share.

Wall Street analysts are looking for Vitamin Shoppe to report earnings that are up 19% and for sales to jump 11%. This company has beaten Wall Street estimates the last four quarters in a row and its coming off a quarter in which it topped forecasts by 6 cents, reporting a profit of 38 cents per share versus a mean estimate of net income of 32 cents per share. This company has averaged year-over-year revenue growth of 14.1% over the last four quarters.

The current short interest as a percentage of the float for Vitamin Shoppe is notable at 9.6%. That means that out of the 26.10 million shares in the tradable float, 2.53 million shares are sold short by the bears. This is a decent short interest on a stock with a very low float. If Vitamin Shoppe can produce bullish earnings results, then this stock could easily experience a sizeable short-squeeze post-earnings.

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From a technical perspective, VSI is currently trading above both its 50-day and 200-day moving averages, which is bullish. This stock recently broke out above some past overhead resistance at $45.84 to $46.15 a share, and subsequently ran up to a recent high of $49.27 a share. After tagging that all-time high, VSI has pulled back toward its current price near $45 a share.

If you’re a bull on VSI, I would wait until after its report and look for long-biased trades if this stock can manage to break out to an all-time high above $49.27 a share with high volume. Look for volume on that move that’s near or well above its three-month average volume of 316,894 shares. If we get that action, then look for VSI to tag $55 a share or higher if the bulls gain full control of this stock post-earnings.

I would simply avoid VSI 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 $44.56 a share on heavy volume. If we get that selloff, then look for VSI to trend down toward its 200-day moving average of $41.43 a share or possibly lower post-earnings.

Solazyme

Another potential earnings short-squeeze trade in the oil and gas complex is Solazyme (SZYM), which is set to release numbers on Monday after the market close. This company’s technology transforms a range of plant-based sugars into oils. Wall Street analysts, on average, expect Solazyme to report revenue of $10.48 million on a loss of 30 cents per share.

If you’re looking for a beaten-down heavily-shorted stock heading into its earnings report, then make sure to check out shares of Solazyme. In just the last month, this stock has plunged from a high of $16.31 to a recent low of $9.40 a share. That move has pushed Solazyme into oversold territory since its current relative strength index (RSI) is 29.93.

The current short interest as a percentage of the float for Solazyme is extremely high at 20.6%. That means that out of the 34.70 million shares in the tradable float, 6.17 million shares are sold short by the bears. The bears have also been increasing their bets from the last reporting period by 13.4%, or by about 727,000 shares. If the bears are caught leaning too strong into this quarter, then this heavily shorted stock could easily explode higher post-earnings.

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From a technical perspective, SZYM is currently trading below both its 50-day and 200-day moving averages, which is bearish. This stock had been in a strong uptrend during the last six months, with shares soaring from a low of $10.14 to a recent high of $16.31 a share. That said, the stock sold off big in the last month pushing SZYM into oversold territory. Oversold can always get more oversold, but if we get any strength post-earnings, then SZYM could setup for a big short squeeze.

If you’re in the bull camp on SZYM, then I would wait until after it reports and look for long-biased trades if this stock can trigger a break out above some near-term overhead resistance at $10.23 a share with high volume. Look for volume on that move that hits close to or above its three-month average volume of 630,229 shares. If we get that move, then SZYM could easily hit its 200-day moving average of $12.53 or even $13 a share post-earnings.

I would avoid SZYM or look for short-biased trades if the stock fails to trigger that move, and then drops back below some near-term support at $9.40 a share with high-volume. Target a drop back towards its next significant previous support levels at $9 to $7.50 if the bears destroy this stock post-earnings.

Seattle Genetics

One earnings short-squeeze candidate in the biotechnology and drugs complex is Seattle Genetics (SGEN), which is set to release numbers on Tuesday after the market close. This company focused on the development and commercialization of monoclonal antibody-based therapies for cancer. Wall Street analysts, on average, expect Seattle Genetics to report revenue of $52.33 million on a loss of 12 cents per share.

This company is looking to beat Wall Street estimates for the third quarter in a row. During the last quarter, Seattle Genetics beat Wall Street estimates with a loss of 24 cents per share versus a mean estimate of 30 cents. And in the prior quarter, the company reported a net loss of 35 cents per share. As we approach its earnings report, shares of Seattle Genetics are trading just a few points off its 52-week high of $22.40 a share.

The current short interest as a percentage of the float for Seattle Genetics is extremely high at 27.4%. That means that out of the 114.86 million shares in the tradable float, 31.43 million are sold short by the bears. This is a huge short interest, so if Seattle Genetics can beat earnings estimates and raise forward guidance, then this stock could easily skyrocket post-earnings.

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From a technical perspective, SGEN is currently trading below its 50-day moving average and above its 200-day moving average, which is neutral trendwise. This stock has been uptrending strong for the past six months, with shares soaring from a low of $14.61 to a recent high of $21.04 a share. That said, this stock has recently slipped back below its 50-day moving average of $19.19 a share, but it’s still trading within range of a near-term breakout trade.

If you’re bullish on SGEN, I would look for long-biased trades after its report if this stock manages to break out above some near-term overhead resistance at $20.20 to $21.04 a share high-volume. Look for volume on that move that registers near or well above its three-month average volume of 1,122,660 shares. If we get that action, then SGEN should easily tag and possibly break out above its 2011 high of $22.40 a share.

I would simply avoid SGEN 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 $18.10 a share with heavy volume. If we get that action, target a drop towards $17 to $16 a share or possibly lower if the bears gain full control of this stock post-earnings.

Tangoe

My final earnings short-squeeze play today is software and programming player Tangoe (TNGO), which is set to release numbers on Tuesday after the market close. This is a global provider of on-demand communications lifecycle management software and related services. Wall Street analysts, on average, expect Tangoe to report revenue of $33 million on earnings of 8 cents per share.

Sales growth for Tangoe has registered between 56% and 59% during the past three quarter. Wall Street analysts are looking for earnings growth of 62% this year and 33% next year. As we approach its earrings report, shares of Tangoe are trading just a few points off its 52-week high of $21.74 a share.

The current short interest as a percentage of the float for Tangoe stands at 6%. That means that out of the 29.98 million shares in the tradable float, 1.76 million shares are sold short by the bears. This isn’t a huge short interest, but it’s more than enough to spark a decent short covering rally if Tangoe can deliver what the bulls are looking for.

From a technical perspective, TNGO 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 six months, with shares ripping higher from a low of $12 to a recent high of $21.74 a share. During that move, shares of Tangoe have consistently made higher lows and higher highs, which is bullish technical price action. Now this stock is trading within range of a near-term breakout trade.

If you’re bullish on TNGO, I would wait until after they report and look for long-biased trades if this stock breaks out above some near-term overhead resistance at $21.60 to $21.74 a share with high-volume. Look for volume on that move that’s near or well above its three-month average action of 595,122 shares. If we get that action, look for TNGO to pop toward $25 a share or higher if the bulls gain full control of this stock post-earnings.

I would simply avoid TNGO or look for short-biased trades if it fails to trigger that breakout, and then drops below its 50-day moving average of $19.08 a share on heavy volume. If we get that action, look for TNGO to potentially drop towards its next significant support levels at $16.94 to $15 a share 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.