Stock Quotes in this Article: CASY, FDS, FNSR, PIR, 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.

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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 -- 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.

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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.

Michael Kors

My first earnings short-squeeze trade idea today is apparel player 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 $360.62 million on earnings of 16 cents per share.

Just this morning, Wedbush said it would be a buyer of Michael Kors shares ahead of the company’s earnings report as it sees potential for modest upside to estimates. The firm believes upside in the fourth quarter and maintained guidance for the balance of 2013 could lead to short covering, which it thinks may minimize any pressure resulting from the expiration of the IPO lockup on June 12. Wedbush reiterates an outperform rating on the stock with a $48 price target.

The current short interest as a percentage of the float for Michael Kors sits at 3%. That means that out of the 112.12 million shares in the tradable float, 3.18 million shares are sold short by the bears. The bears have also been increasing their bets from the last reporting period by 41.8%, or by about 937,900 shares. If the bears are caught learning too hard into this quarter, then we could easily see a solid short-squeeze develop post-earnings.

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From a technical perspective, KORS is currently trading below its 50-day moving average, which is bearish. This stock formed a double top in March at around $50.69 to $50.48 a share. Since forming that top, shares of KORS have downtrended towards its recent low of $35.50 a share. During that downtrend, shares of KORS have consistently made lower highs and lower lows, which is bearish technical price action.

If you’re in the bull camp on KORS, I would wait until after they release earnings and look for long-biased trades if this stock can manage to take out its 50-day moving average of $42.29, and then move above some near-term overhead resistance at $42.51 with high volume. Look for volume on that move that registers near or above its three-month average action of 2.8 million shares. If we get that action, then KORS could re-test its May high 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 back above its 50-day, and then drops below that near-terms support at $35.50 a share with high-volume. If we get that action, then KORS could easily hit $32.50 to $30 a share or lower if the bears hammer this stock down post-earnings.

As of the most recently reported quarter, Michael Kors was one of Lone Pine Capital's top holdings and also showed up in Blue Ridge Capital's portfolio.

Casey’s General Stores

A potential earnings short-squeeze trade in the retail grocery complex is Casey’s General Stores (CASY), which is set to release its numbers on Tuesday after the market close. This company, together with its subsidiaries, operates convenience stores under the Casey’s General Store, HandiMart and Just Diesel names in 11 Midwestern states, primarily Iowa, Missouri, and Illinois. Wall Street analysts, on average, expect Casey’s General Stores to report revenue of $1.74 billion on earnings of 67 cents per share.

If you’re looking for a stock that’s trending very strong heading into its earrings report this week, then make a sure to check out shares of Casey’s General Stores. During the last six months, shares of Casey’s General Stores are up over 20%, and the stock is current trading just a point off its 52-week high of $60.60 a share.

The current short interest as a percentage of the float for Casey’s General Stores is notable at 5.8%. That means that out of the 37.81 million shares in the tradable float, 2.19 million shares are sold short by the bears. The bears have also been increasing their bets from the last reporting period by 11.4%, or by about 224,000 shares.

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From a technical perspective, CASY 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 soaring from a low of $46.84 to a recent high of $60.60 a share. During that uptrend, shares of CASY have consistently made higher lows and higher highs, which is bullish technical price action. That move has how pushed CASY within range of triggering a major breakout post-earnings.

If you’re bullish on CASY, I would wait until after they report and look for long-biased trades if this stock can manage to trigger a break out above $60.60 a share with high-volume. Look for volume on that move that registers near or above its three-month average action of 239,328 shares. If we get that move, then CASY could easily trade north of $65 a share post-earnings.

I would simply avoid CASY or look for short-biased trades if after earnings this stock fails to trigger that breakout, and then drops below some near-term support at $58.50 a share with heavy volume. If we get that action, then look for CASY to re-test and possibly take out its 50-day moving average of $56.75 a share.

FactSet Research Systems

One potential earnings short-squeeze trade in the computer services complex is FactSet Research Systems (FDS), which is set to release numbers on Tuesday before the market open. This company is a provider of integrated financial information and analytical applications to the global investment community. Wall Street analysts, on average, expect FactSet Research Systems to report revenue of $202.95 million on earnings of $1.04 per share.

This company is looking to beat Wall Street estimates for the third straight quarter. Last quarter, it report a profit of $1.05 per share vs. Wall Street estimates of $1 per share, and the quarter before, the company topped estimates by 2 cents with a profit of $1.02 per share vs. estimates of $1 per share.

The current short interest as a percentage of the float for FactSet Research Systems stands at 7.8%. That means that out of the 41.34 million shares in the tradable float, 3.22 million shares are sold short by the bears. This isn’t a huge short interest, but it’s more than enough to trigger a sizeable short-squeeze post-earnings if FactSet Research Systems can deliver the news the bulls are looking for.

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From a technical perspective, FDS is currently trading above both its 50-day and 200-day moving averages, which bullish. This stock has been uptrending strong since it broke out in March with heavy volume above some overhead resistance at around $93 a share. Since triggering that breakout, shares of FDS have soared to a recent high of $109.20 a share. During that move, shares of FDS have consistently made higher lows and higher highs, which is bullish technical price action. That move has how pushed FDS within range of triggering a near-term breakout trade post-earnings.

If you’re in the bull camp on FDS, then 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 $108.00 to $109.20 a share with high volume. Look for volume on that move that registers near or above its three-month average action of 400,680 shares. If we get that action, then the bulls could easily push FDS towards $120 a share or higher post-earnings.

I would avoid FDS or look for short-biased trades if after earnings this stock fails to trigger that breakout, and then drops below its 50-day moving average of $103.27 to $102.11 a share with high-volume. If we get that move, then look for FDS to trade down towards $98 to $95 a share or possibly lower if the bears blast this stock down post-earnings.

Finisar

An earnings short-squeeze play in the communications equipment complex is Finisar (FNSR), which is set to release numbers on Monday after the market close. This company designs, develops, manufactures, and markets optical subsystems and components that are used to interconnect equipment in short-distance local area networks, storage area networks, longer distance metropolitan area networks, fiber-to-the-home networks, cable television networks, and wide area networks. Wall Street analysts, on average, expect Finisar to report revenue of $242.62 million on earnings of 21 cents per share.

This company reported in line estimates last quarter after missing numbers in the prior quarter. In the third quarter profit dropped 52.7% to $8.9 million or 9 cents per share, from $18.8 million or 22 cents per share the year earlier, meeting analyst expectations. Revenue dropped 7.6% to $243 million from $263 million.

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The current short interest as a percentage of the float for Finisar is very high at 15.9%. That means that out of the 89.57 million shares in the tradable float, 14.17 million shares are sold short by the bears. This is a large amount of bears involved in this stock, so if Finisar can report strong results and bullish forward guidance, then this stock could easily see a sizeable short-squeeze post-earnings.

From a technical perspective, FNSR is currently trading below both its 50-day and 200-day moving averages, which is bearish. During the last four months, shares of FNSR have downtrended badly from a high of $23.50 to a recent low of $12.82 a share. During that sharp move lower, this stock has consistently made lower highs and lower lows, which is bearish technical price action. That said, shares of FNSR have bounced off $12.82 to its current price of around $14.50 a share. That bounce has pushed the stock within range of triggering a near-term breakout trade post-earnings.

If you’re bullish on FNSR, I would look for long-biased trades if after they report it manages to trigger a break out above its 50-day moving average of $15.97 a share with high-volume. Look for volume on that move that hits near or above its three-month average action of 2.4 million shares. If we get that action, then FNSR could easily trend higher back towards its 200-day moving average of $18.35 a share or possibly higher of the bulls gain full control of this stock post-earnings.

I would simply avoid FNSR or look for short-biased trades after earnings the stock fails to trigger that near-term breakout, and then moves back below that major support level of $12.82 a share with high-volume. A move below $12.82 and then below its 52-week low of $12.26 would be very bearish for FNSR.

Pier 1 Imports

My final earnings short-squeeze play today is specialty retailer Pier 1 Imports (PIR), which is set to release numbers on Thursday before the market open. This company is a specialty retailer of decorative home furnishings and gifts. Wall Street analysts, on average, expect Pier 1 Imports to report revenue of $360.01 million on earnings of 16 cents per share.

Pier 1 Imports earnings have been in line with consensus estimates in recent quarters.

The current short interest as a percentage of the float for Pier 1 Imports is rather high at 8.3%. That means that out of the 92.97 million shares in the tradable float, 7.85 million are sold short by the bears. This is a decent short interest on a stock with a relatively low float. If Pier 1 Imports can manage to report solid number and bullish forward guidance, then the stock could easily see a sharp short-squeeze develop post-earnings.

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From a technical perspective, PIR is currently trading above its 200-day moving average and below its 50-day moving average, which is neutral trendwise. This stock has been downtrending for the past three months, with shares falling from a high of $19.05 to a recent low of $14.79 a share. During that downtrend, shares of PIR have consistently made lower highs and lower lows, which is bearish technical price action. That said, this stock recently found buying interest right off its 200-day moving average of $14.59 a share.

If you’re in the bull camp on PIR, I would wait until after they report and look for long-biased trades if this stock takes out its 50-day moving average of $16.97 a share with high-volume. Look for volume on that move that’s near or above its three-month average action of 1.9 million shares. If we get that move, then look to add to any long positions in PIR once it takes out some more resistance at $18.06 with heavy volume. Target a move towards $19.05 or higher post-earnings.

I would simply avoid PIR or look for short-biased trades if it fails to trigger that breakout, and then takes out its 200-day moving average at $14.59 with heavy volume. If we get that move, then I would target a drop toward $13 a share or lower for PIR 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.