Stock Quotes in this Article: AA, ADTN, FAST, HST, OZRK

WINDERMERE, Fla. (Stockpickr) -- With earnings season about to kick off on Wall Street in a big way, it’s time for market-players to create a powerful watch list of stocks due to report numbers that are also heavily shorted by the bears.

Short-sellers hate being caught short a stock that produces earnings that please the bulls. When this happens, we often see 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 will 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 the stock is acting extremely bullish technically and you have a very strong conviction that it's going to rip higher.

    Here’s a look at a number of stocks that could experience big short squeezes when they report earnings this week.

     

    Host Hotels & Resorts

    My first earnings short-squeeze idea is Host Hotels & Resorts (HST), which is set to report its numbers on Wednesday before the market open. Host Hotels, a publicly owned real estate investment trust primarily engaged in the ownership and operation of hotel properties in the U.S. as well as Canada, Mexico, Chile, the UK, Italy, Spain and Poland. Wall Street analysts, on average, expect the company to report revenue of $1.13 billion on earnings of 16 cents per share.

    Host Hotels has been beaten down big in front of the quarter; shares have dropped from its July high of $17.75 to a recent low of $9.78. The company beat Wall Street estimates last quarter after missing estimates in the prior two quarters. Revenue has been trending higher during the past three quarters, by 10.8%, 13.2% and 8.9%.

    The current short interest as a percentage of the float for Host Hotels & Resorts stands at 5.5%. That means that out of the 691.45 million shares in the tradable float, 37.66 million are sold short by the bears. This isn’t a huge short-interest, but it's more than enough to spark a short-covering really if this company can report a solid quarter and guide higher.

    From a technical standpoint, this stock is currently trading below both its 50-day and 200-day moving averages, which is bearish. That said, the stock is quickly approaching its 50-day moving average of $11.57 a share, with the stock trading at around $11.50. Over the past two months, this stock has started to form a sideways trading pattern between $9.78 and $12 a share. A move outside of this pattern either way should define the trend for this stock in the short term.

    If you’re bullish on HST, I would buy this stock after its report if it can break out above $12 to $12.74 a share on solid volume. Look for volume that’s tracking in close to or above its three-month average volume of 11.2 million shares. If the stock can take out those levels with volume post-earnings, then I would prepare for a large short-squeeze that could take it back toward its 200-day of 15.93 a share.

    On the flipside, I would short this stock after earnings if it drops below $9.78 a share on heavy volume or if it fails to take out the 50-day moving average. I would add to any short position once the stock trades below $9.32 a share on heavy volume. Target a drop back toward $8 to $7 a share if the bears knock this lower post-earnings.

    Host Hotels was featured recently in "8 Dividend Stocks Increasing Payouts."

    Alcoa

    Another potential earnings short-squeeze trade is Alcoa (AA), which is set to report results on Tuesday after the market close. Alcoa is engaged in the production and management of primary aluminum, fabricated aluminum and alumina combined. Wall Street analysts, on average, expect the company to report revenue of $6.24 billion on earnings of 22 cents per share.

    Alcoa has been absolutely crushed in front of the quarter, with shares dropping from its July high of $16.56 a share to a recent low of $8.45 a share. This could be setting up a rebound trade for Alcoa if the company can report a decent quarter and guide higher. That said, with this stock, I would recommend waiting until after the quarter since a number of analysts have cut estimates ahead of the report.

    The current short interest as a percentage of the float for Alcoa is worth mentioning at 5.6%. That means that out of the 1.06 billion shares in the tradable float, 59.39 million are sold short by the bears. This isn’t a huge short interest, but it’s more than enough on such a liquid stock to spark a sizeable short-covering rally if we get some bullish news.

    From a technical standpoint, this stock is trading below both its 50-day and 200-day moving averages, which is bearish. This stock has also been downtrending since forming a double top in July at around $16.50 a share. That said, the stock just rebounded sharply off its 52-week low of $8.45 on some above-average volume.

    If you’re bullish on this name, I would wait until after its report and buy the stock once it breaks out above $10.88 and $11.53 a share (its 50-day) on big volume. Look for volume that’s tracking close to or above its three-month average action of 29.2 million shares. If we get that breakout, I would then only add to the position if the stock trades above $13 a share. I would lock in profits quickly if the stock runs into selling resistance at around $12 to $12.50 post-earnings.

    I would get short this stock after its report only if it drops below $10 a share on big volume. A move below that level should set this stock up for a big fall back towards $8.45 a share if the bears come in and whack this name lower post-earnings.

    Alcoa was featured recently in "5 Technical Setups for Breakout Gains."

    Bank of the Ozarks

    One earnings short-squeeze play in the banking sector is Bank of the Ozarks (OZRK), which is set to release numbers on Wednesday after the market close. Bank of the Ozarks provides a range of retail and commercial banking services, as well as mortgage lending and corporate cash management services. Wall Street analysts, on average, expect the company to report revenue of $55.91 million on earnings of 42 cents per share.

    Bank of the Ozarks is on tap to potentially beat Wall Street earnings estimates for the fifth straight quarter. If the company can deliver revenue near the current Wall Street estimate of $55.91 million, that would represent a 35.4% increase from the year-ago quarter. The company's revenue has been trending higher for the last three straight quarters.

    The current short interest as a percentage of the float for Bank of the Ozarks is a whopping 16.9%. That means that out of the 28.16 million shares in the tradable float, 4.82 million are sold short by the bears. This is a very large short position, so a decent quarter and guidance bump should set this stock up for a big short-squeeze.

    From a technical standpoint, this stock is currently trading above its 50-day moving average but below its 200-day moving average, which is neutral trendwise. During the past two months, the stock has started to form a sideways trading pattern, with shares trading between $19 and $23 a share. What’s great about this pattern is that it sets up perfectly for a breakout trade if the bulls get what they’re looking for.

    The way I would play Bank of the Ozarks is to wait until after its report and buy if the stock breaks out above $23 to $23.50 a share on big volume. Look for volume that’s tracking in close to or above the three-month average action of 264,300 million shares. If we get a big-volume breakout, then I would target a run back toward $25 to $27 a share if the bulls push this significantly higher following earnings.

    I would get short this stock after its report only if it drops below $21 to $20 a share on heavy volume. I would target a drop back toward $18.50 a share or possibly even lower if the bears gain full control of this stock post-earnings.

    Bank of the Ozarks, one of TheStreet Ratings' top-rated regional bank stocks, shows up on a recent list of 5 Rational Bank Stock Picks for an Irrational market.

    Adtran

    One earnings short-squeeze candidate in the communications equipment complex is Adtran (ADTN), which is set to release numbers on Wednesday before the market open. Adtran designs, manufactures, markets and services network access solutions for communications networks. Wall Street analysts, on average, expect the company to report revenue of $189.44 million on earnings of 56 cents per share.

    Adtran is another company on tap to beat Wall Street estimates for the fifth straight quarter. Its profits have trended higher year over year by an average of 65.8% over the past five quarters. This is also another massively beaten-down stock ahead of earnings; shares have dropped from the July high of 42.46 to a recent low of $25.46 a share.

    The current short interest as a percentage of the float for Adtran is notable at 5.6%. That means that out of the 64.25 million shares in the tradable float, 3.34 million are sold short by the bears. This isn’t a huge short interest, but it’s large enough to spark some short-covering -- especially since the bears have racked up some big profits, considering how hard the stock has dropped from July highs.

    >>5 S&P 500 Stocks for a Short-Squeeze Pop

    From a technical standpoint, this stock is currently trading below both its 50-day and 200-day moving averages, which is bearish. During the past two months, the stock has started to form a sideways trading pattern between $25.50 and $32.70 a share. Traders should now watch for a move outside of this pattern to define the next major trend on the stock.

    The way I would play Adtran is to wait until after it reports its results and buy this stock if it trades above some near-term overhead resistance at around $30 a share on heavy volume. Look for volume that’s tracking in close to or above its three-month average volume of 1.08 million shares. I would add to any long position once the stock takes out $32.74 on solid volume. Target a run back toward $35 to $37.87 a share (its 200-day moving average) if the bulls spark a solid short-squeeze post-earnings.

    I would short this name after its report only if the stock fails at $29.25 a share (50-day) and you see large selling volume move in. I would add to any short position once this stock takes out $27 to $25.50 a share and target a drop back towards $23 to $22 a share if the bears hammer this lower post-earnings.

    >>Practice your stock trading strategies and win cash in our stock game.

    Fastenal

    My final earnings short-squeeze candidate today is Fastenal (FAST), which is set to release numbers on Thursday before the market open. Fastenal, one of TheStreet Ratings' top-rated supplier and distributor stocks, sells industrial and construction supplies in a wholesale and retail fashion. Wall Street analysts, on average, expect the company to report revenue of $721.96 million on earnings of 33 cents per share.

    Fastenal has registered double-digit year-over-year revenue growth for the past four quarters. During that timeframe, the company has averaged growth of 22.4%. Its net income has shown strong trends in the last three quarters, rising by 36.1% in the second quarter, 42% in the first quarter and 46.3% in the fourth quarter.

    The current short interest as a percentage of the float for Fastenal is a rather large 10.5%. That means that out of the 267.78 million shares in the tradable float, 28.20 million are sold short by the bears. This is a large short interest, so any strength in this stock following the quarter could spark a large short-covering rally.

    From a technical standpoint, this stock is currently trading above both its 50-day and 200-day moving averages, which is bullish. This stock has been printing higher lows and higher highs for most of the past two months, since shares hit a near-term bottom at around $29.14 a share.

    The only way I would play this stock on the long side would be to buy some shares after Fastenal releases its results if the stock can manage to break out above $36 to $37.78 a share on big volume. Look for volume that’s tracking in close to or above its three-month average action of 2.9 million shares. A breakout on this stock following earnings would trigger a bullish technical move, so look for a big short squeeze if that happens.

    I would get short this stock following earnings only if shares drop below $34 to $33 (its 50-day moving average) on heavy volume. A move below those levels and then below $32.17 (its 200-day moving average) should set this stock up to drop back toward $31 to $29 a share or possibly even lower if the bears knock the stock down post-earnings.

    To see more potential earnings short squeeze candidates, including Universal Forest Products (UFPI), Audiovox (VOXX) and Mechel (MTL), 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.