Stock Quotes in this Article: ADBE, ATU, BKS, FSII, LZB

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.

Barnes & Noble

My first earnings short-squeeze trade idea is bookseller Barnes & Noble (BKS), which is set to report results on Tuesday before the market open. This company is a content, commerce and technology company that provides customers access to books, magazines, newspapers and other content across its multi-channel distribution platform. Wall Street analysts, on average, expect Barnes & Noble to report revenue of $1.48 billion on a loss of 93 cents per share.

Shares of Barnes & Noble spiked up 9.5% in premarket trading today on rumors that Microsoft (MSFT) will be introducing a table with Xbox live streaming when the company holds a special event at 3:30 p.m. Microsoft has been rumored to be teaming up with Barnes & Noble for the innovative design. Maxim Research reiterated its buy rating on the stock with a $32 price target, on estimations that they will report $1.5 billion in revenues, up 11% year-over-year and EBITDA of $28 million.

The current short interest as a percentage of the float for Barnes & Noble is extremely high at 41.1%. That means that out of the 30.75 million shares in the tradable float, 15.45 million shares are sold short by the bears. If Barnes & Noble can manage to report a solid quarter and issue bullish guidance, then this stock could see a huge short-squeeze post-earnings.

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From a technical perspective, BKS is currently trading above its 200-day moving average and right at its 50-day moving average, which is neutral trendwise. This stock gapped up huge in May from around $14 to a high of $26 a share on massive upside volume. Following that gap, shares of BKS have downtrended from $26 to a recent low of $14.56 a share. During that sharp move lower, this stock has been making mostly lower highs and lower lows, which is bearish technical price action.

If you’re in the bull camp on BKS, then I would wait until after it releases earnings and look for long-biased trades if this stock can manage to trigger a near-term breakout above $16.55 to $17.52 a share with high-volume. Look for volume on that move that registers near or above its three-month average action of 2.1 million shares. If we get that move, then look for BKS to trade up towards its next significant overhead resistance levels at $19.50 to $21 a share post-earnings.

I would simply avoid BKS or look for short-biased trades if after earnings it fails to trigger that breakout, and then drops below some near-term support at $14.56, and then its 200-day moving average of $13.77 a share with high volume. If we get that move, then BKS could hit $13 to $11 a share if the bears whack this stock lower post-earnings.

FSI International

Another potential earnings short-squeeze trade is semiconductor player FSI International (FSII), which is set to release its numbers on Tuesday after the market close. This company designs, manufactures, markets and supports equipment used in the fabrication of microelectronics, such as advanced semiconductor devices. Wall Street analysts, on average, expect FSI International to report revenue of $50.40 million on earnings of 21 cents per share.

If you’re looking for a heavily shorted small-cap stock that’s trending very strong heading into its quarter, then make sure to check out shares of FSI International. This stock is up over 25% during the last six months, and it’s currently trading about $1.40 off its 52-week high of $5.44 a share.

The current short interest as a percentage of the float for FSI International is notable at 7.8%. That means that out of the 34.61 million shares in the tradable float, 3.05 million shares are sold short by the bears. This stock has a decent short interest and a relatively low float. If FSI International can deliver the numbers the bulls are looking for, then this stock could see a sizeable short-squeeze post-earnings.

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From a technical perspective, FSII is currently trading above its 200-day moving average and right below its 50-day moving average, which is neutral trendwise. This stock topped out in May at around $5.12 to $5.14 a share. After forming that top, shares of FSII have traded down to a recent low of $2.98 a share. Since hitting that low, FSII have rebounded and moved back above its 200-day moving average.

If you’re bullish on FSII, I would wait until after it reports earnings and look for long-biased trades if this stock can manage to trigger a breakout back above its 50-day at $4.16, and above some near-term overhead resistance at $4.63 a share with high-volume. Look for volume on that move that hits near or above its three-month average action of 616,285 shares. If we get that action, then look for FSII to re-test and possibly take out its next significant overhead resistance levels at $5.14 to $5.44 a share.

I would simply avoid FSII or look for short-biased trades if after earnings this stock fails to maintain a trend back above its 50-day moving average at $4.15 with strong upside volume flows.

La-Z-Boy

Another potential earnings short-squeeze trade is reclining chairs producer La-Z-Boy (LZB), which is set to release numbers on Tuesday after the market close. This company manufactures, markets, imports, distributes and retails upholstery products, accessories and casegoods (wood) furniture products. Wall Street analysts, on average, expect La-Z-Boy to report revenue of $332.72 million on earnings of 26 cents per share.

The current short interest as a percentage of the float for La-Z-Boy is rather high at 9.4%. That means that out of the 46.86 million shares in the tradable float, 4.69 million shares are sold short by the bears. The bears have also been increasing their bets from the last reporting period by 16.5%, or by about 664,000 shares. If the bears are caught learning too hard into this quarter, then we could easily see a large short-squeeze develop for shares of La-Z-Boy.

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From a technical perspective, LZB is currently trading above both its 200-day moving average and below its 50-day moving average, which neutral trendwise. This stock has been downtrending since the beginning of May, with shares sliding lower from $16.43 to a recent low of $12.58 a share. During that move lower, this stock has been making mostly lower highs and lower lows, which is bearish price action. That said, shares of LZB have found some buying interest at around $12.60 a share in the last few weeks.

If you’re in the bull camp on LZB, then I would wait until after its report and look for long-biased trades if this stock can manage to trigger a break out above its 50-day moving average of $14.27 and then above some more overhead resistance at $14.93 a share with high volume. Look for volume on that move that registers near or above its three-month average action of 558,672 shares. If we get that action, then look for LZB to re-test and possibly take out its May high of $16.43 a share if the bulls gain full control of this stock post-earnings.

I would avoid LZB or look for short-biased trades if after earnings this stock fails to trigger that breakout, and then drops below its 200-day moving average of $12.22 a share on high volume. If we get that move, then LZB could easily trade down back towards its next previous support zones at $11 to $9 a share if the bears hammer this stock lower post-earnings.

Adobe Systems

One potential earnings short-squeeze trade in the software complex is Adobe Systems (ADBE), which is set to release numbers on Tuesday after the market close. This company offers a line of software and services used by creative professionals, marketers, knowledge workers, application developers, enterprises, and consumers. Wall Street analysts, on average, expect Adobe Systems to report revenue of $1.11 billion on earnings of 59 cents per share.

During the last quarter, Adobe Systems missed Wall Street estimates by 2 cents, reporting a profit of 42 cents per share vs. estimates of 46 cents per share. This company beat Wall Street estimates in the fourth quarter of the last fiscal year. Adobe Systems is looking to register its fifth-straight quarter of revenue increases. The company is also trying to rebound from profit declines in the last three quarters.

The current short interest as a percentage of the float for Adobe Systems sits at 3.3%. That means that out of the 463.56 million shares in the tradable float, 16.14 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-cover rally post-earnings if the bulls get the news their looking for.

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From a technical perspective, ADBE is currently trading above its 200-day moving average and just above its 50-day moving average, which is bullish. This stock recently traded down and tested its 200-day moving average of $29.94 a share, and has since then rebounded to trade just above its 50-day. This move is pushing ADBE within range of triggering a near-term breakout trade.

If you’re bullish on ADBE, I would look for long-biased trades if after earnings it triggers a near-term breakout above some overhead resistance at $32.85 a share with high volume. Look for volume on that move that hits near or above its three-month average action of 4 million shares. If we get that action, then ADBE could easily re-test and take out its next significant overhead resistance levels at $34.09 to $34.78 a share.

I would simply avoid ADBE or look for short-biased trades after earnings the stock fails to trigger that breakout, and then moves below some near-term support at $31 a share with high volume. If we get that action, then ADBE could re-test and possibly take out its next significant support level at $29.81 a share post-earnings.

Actuant

My final earnings short-squeeze play today is fabricated products player Actuant (ATU), which is set to release numbers on Wednesday before the market open. This company designs, manufactures and distributes a range of industrial products and systems. Wall Street analysts, on average, expect Actuant to report revenue of $429.21 million on earnings of 59 cents per share.

This company has beaten Wall Street estimates for the last four quarters and its coming off a quarter where it crushed estimates by 6 cents, after reporting a net income of 43 cents per share vs. estimates of 37 cents per share. During the second quarter, profit jumped more than fourfold to $32.2 million from $7.9 million the year earlier. Revenue soared 14.3% to $378 million from $330.7 million. Actuant has averaged year-over-year revenue growth of 33.3% over the last four quarters.

The current short interest as a percentage of the float for Actuant is rather high at 9.7%. That means that out of the 62.68 million shares in the tradable float, 6.05 million are sold short by the bears. The bears have also been increasing their bets from the last reporting period by 6.8%, or by about 383,000 shares. If the bears are caught learning too hard into this quarter, then we could easily see a monster short-squeeze develop.

From a technical perspective, ATU is currently trading above its 200-day moving average and right below its 50-day moving average, which is neutral trendwise. Prior to the end of May, this stock was downtrending hard, with shares dropping from a high of $29.97 to a recent low of $24.23 a share. During that move lower, shares of ATU have mostly made lower highs and lower lows, which is bearish technical price action. That said, during the last month and change this stock has found buying interest at $24.33 to $23.23 a share, and its rebounded towards its current price of $26 a share.

If you’re in the bull camp on ATU, then I would wait until after they report and look for long-biased trades if it can manage to trigger a near-term breakout above some overhead resistance at $26.69 with high volume. Look for volume on that move that’s near or above its three-month average action of 698,527 shares. If we get that move, then look for ATU to hit $28 to $30 a share or possibly higher if the bulls spark a sizeable short-squeeze post-earnings.

I would simply avoid ATU or look for short-biased trades if it fails to trigger that breakout, and then moves below some near-term support at $25.50 to $24.23 a share with heavy volume. If we get that move, then I would look for ATU to trade down towards its next significant support levels at $22 to $20 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.