Stock Quotes in this Article: APOL, AVAV, LEN, OMN, SNX

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. 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.

AeroVironment

My first potential earnings short-squeeze trade is aerospace and defense player AeroVironment (AVAV), which is set to report results on Tuesday after the market close. This company designs, develops, produces and supports unmanned aircraft systems, and efficient energy systems for various industries and governmental agencies. Wall Street analysts, on average, expect AeroVironment to report revenue of $111.32 million on earnings of 72 cents per share.

The current short interest as a percentage of the float for AeroVironment sits at 7.9%. That means that out of the 18.23 million shares in the tradable float, 1.48 million shares are sold short by the bears. This is a situation with a very low float and decent short interest. If AeroVironment can deliver the numbers the bulls are looking for, then we could easily see a large short squeeze develop post-earnings.

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From a technical perspective, AVAV is currently trading above its 50-day moving average and below its 200-day moving average, which is neutral trendwise. This stock recently hit a 52-week low of $21.14 a share and subsequently rallied hard to its current price of around $26 a share. That rally pushed shares of AVAV back above its 50-day moving average of $23.59 a share with heavy volume. Now AVAV is trading within range of triggering a near-term breakout trade post-earnings.

If you’re bullish on AVAV, then I would wait until after it reports earnings and look for long-biased trades if this stock can manage to trigger a break out above some near-term overhead resistance at $26.25 and then above its 200-day moving average of $28.01 a share with high-volume. Look for volume on that move that hits near or above its three-month average action of 227,434 shares. If we get that move, then AVAV has a great chance of re-testing and possibly taking out its February high of $31.87 a share.

I would simply avoid AVAV or look for short-biased trades if after earnings it fails to trigger that breakout, and then drops below some major near-term support at $23 a share with high-volume. If we get that move, then AVAV will be trending back below its 50-day, and it could easily re-test and possibly take out its 52-week low of $21.14 a share.

Lennar

Another potential earnings short-squeeze play is homebuilding player Lennar (LEN), which is set to release its numbers on Wednesday before the market open. This company, together with its subsidiaries, engages in homebuilding, financial services and real estate businesses in the U.S. Wall Street analysts, on average, expect Lennar to report revenue of $885.71 million on earnings of 17 cents per share.

During the last quarter, this company reported a profit of 8 cents per share vs. Wall Street estimates of 5 cents per share. This registered an earnings beat after the company had missed estimates in the prior quarter. In the fourth quarter of the last fiscal year, Lennar missed Wall Street estimates by one cent per share.

The current short interest as a percentage of the float for Lennar is extremely high at 23.4%. That means that out of the 162.41 million shares in the tradable float, 35.58 million shares are sold short by the bears. The bears have also been increasing their bets from the last reporting period by 8.5%, or by about 350,000 shares. If the bears are caught leaning too hard into this quarter, then we could easily see a sizable short-squeeze develop for shares of Lennar post-earnings.

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From a technical perspective, LEN is currently trading above its 200-day moving average and below its 50-day moving average, which is neutral trendwise. This stock recently ran into heavy selling resistance at around $30 a share. After hitting that resistance, shares of LEN dropped back below its 50-day moving average of $26.89 and it hit a near-term low of $23.48 a share. The stock has rebounded off that low and is now trading within range of triggering a near-term breakout trade post-earnings.

If you’re in the bull camp on LEN, then I would wait until after they report numbers and look for long-biased trades if this stock can manage to take out its 50-day at $26.89, and then break out above some near-term overhead resistance at $27.50 a share with high-volume. Look for volume on that move that registers near or above its three-month average action of 7,529,150 shares. If we get that action, then LEN has a great chance of re-testing and possibly taking out its 52-week high of $30.12 a share post-earnings.

I would simply avoid LEN or look for short-biased trades if after earnings this stock fails to trigger that breakout, and then trades back below some near-term support at $25.77 a share with high-volume. If we get that move, then look LEN to re-test and possibly take out some more near-term support at $23.48 a share.

Synnex

One potential earnings short-squeeze trade in the computer peripherals complex is Synnex (SNX), which is set to release numbers on Monday after the market close. This company provides distribution and business process outsourcing services to resellers, retailers, and original equipment manufacturers worldwide. Wall Street analysts, on average, expect Synnex to report revenue of $2.51 billion on earnings of 90 cents per share.

If you’re looking for a heavily shorted beaten-down large-cap stock heading into its earnings report this week, then make sure to check out shares of Synnex. This stock is down over 20% in the last three months, and shares have plunged from its 2012 high of $44.25 to its recent low of $32.41 a share.

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The current short interest as a percentage of the float for Synnexis rather high at 12%. That means that out of the 26.29 million shares in the tradable float, 3.16 million shares are sold short by the bears. The bears have also been increasing their bets from the last reporting period by 2.8%, or by about 85,000 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 Synnex.

From a technical perspective, SNX is currently trading below both its 50-day and 200-day moving averages, which is bullish. This stock has been downtrending hard for the last three months, with shares dropping from $44.25 to a recent low of $32.40 a share. During that downtrend, shares of SNX have consistently made lower highs and lower lows, which is bearish technical price action. That said, during the last few weeks, shares of SNX have started to trend sideways between $32.40 and $34.69 a share. A move outside of that range post-earnings will likely setup SNX for its next major trend.

If you’re bullish on SNX, then I would wait until after they report and look for long-biased trades if this stock can manage to trigger a breakout above some near-term overhead resistance at $34.69 a share and then its 50-day moving average of $34.87 a share with high volume. Look for volume on that move that registers near or above its three-month average volume of 247,897 shares. If we get that action, then SNX could easily re-test and possibly take out its next significant overhead resistance levels at $38.80 to $38.98 a share.

I would avoid SNX or look for short-biased trades if after earnings it fails to trigger that breakout, and then drops below its major near-term support at $32.72 to $32.40 a share with high-volume. If we get that move, then target a drop towards $30 to $28 a share if the bears whack this stock lower post-earnings.

Apollo Group

One potential earnings short-squeeze trade in the education complex is Apollo Group (APOL), which is set to release numbers on Monday after the market close. This company, through its subsidiaries, provides online and on-campus educational programs and services at the undergraduate, masters, and doctoral levels. Wall Street analysts, on average, expect Apollo Group to report revenue of $1.12 billion on earnings of 97 cents per share.

During the last quarter, this company beat Wall Street estimates by 19 cents, coming in at 58 cents per share vs. the estimate of 39 cents per share. That registered the fourth straight quarter in a row of beating Wall Street estimates.

The current short interest as a percentage of the float for Apollo Group is very high at 13.5%. That means that out of the 107.18 million shares in the tradable float, 14.29 million shares are sold short by the bears. The bears have also been increasing their bets from the last reporting period by 14.7%, or by about 1.83 million shares. If the bears are caught pressing their bets too hard into this quarter, then we could easily see a solid short-covering rally for shares of Apollo Group post-earnings.

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From a technical perspective, APOL is currently trading below both its 50-day and 200-day moving averages, which is bearish. This stock has been beaten-down big-time by the bears since March, with shares dropping from over $54 to a recent low of $30.93 a share. During that downtrend, shares of APOL have mostly made lower highs and lower lows, which is bearish technical price action. That said, since hitting that low of $30.93 shares of APOL have started to make higher lows, and it’s in position to make a higher high and break out post-earnings.

If you’re in the bull camp on APOL, I would look for long-biased trades if after earnings it triggers a break out above some near-term overhead resistance at $34.79 to $35.58 a share with high volume. Look for volume on that move that hits near or above its three-month average volume of 2.3 million shares. If we get that action, then APOL will have a great chance of re-testing and possibly taking out its next major overhead resistance levels at $36.25 to $37.36 a share. If all those levels get taken out post-earnings, then APOL has a great chance of hitting $40 to its 200-day moving average of $43.77 a share.

I would simply avoid APOL or look for short-biased trades after earnings the stock fails to trigger that breakout, and then moves below some near-term support at $32.26 to $31.16 a share with high-volume. If we get that action, then APOL will be at risk of taking out its 52-week low of $30.93 a share, which would be very bearish technical price action.

Omnova Solutions

My final earnings short-squeeze trade idea today is chemical manufacturing player Omnova Solutions (OMN), which is set to release numbers on Wednesday after the market close. This company is a provider of emulsion polymers, specialty chemicals and decorative and functional surfaces for a range of commercial, industrial and residential end uses. Wall Street analysts, on average, expect Omnova Solutions to report revenues of $317 million on earnings of 15 cents per share.

If you’re looking for an uptrending small-cap stock heading into its earnings report this week, then make sure to check out shares of Omnova Solutions. This stock has soared so far in 2012 with shares up over 60%, and the stock is currently trading less than one point off its 52-week high of $8.17 a share.
The current short interest as a percentage of the float for Omnova Solutions is notable at 3.9%. That means that out of the 44.13 million shares in the tradable float, 1.72 million are sold short by the bears. The bears have also been increasing their bets from the last reporting period by 10.7%, or by about 166,000 shares.

From a technical perspective, OMN is currently trading above both its 50-day and 200-day moving averages, which is bullish. This stock has been uptrending strong for the past six months, with shares soaring from a low of $4.50 to a recent high of $7.97 a share. During that uptrend, shares of OMN have consistently made higher lows and higher highs, which is bullish technical price action. That move has now pushed OMN within range of triggering a near-term breakout trade post-earnings.

If you’re bullish on OMN, then I would wait until after its report and look for long-biased trades if it can manage to trigger a breakout above some near-term overhead resistance at $7.75 to $7.97 a share with high-volume. Look for volume on that move that registers near or above its three-month average action of 231,770 shares. If we get that action, then OMN could easily spike towards its next significant overheard resistance level at $9.43 a share post-earnings.

I would simply avoid OMN or look for short-biased trades if it fails to trigger that breakout, and then moves back below its 50-day moving average of $7.17 a share with heavy volume. If we get that move, then I would target a drop towards $6.60 to $6.40 a share or possibly much lower if the bears hammer this stock 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.