Stock Quotes in this Article: DELL, EXPR, FN, RAVN, URBN

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.

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.

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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.

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.

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With that in mind, here’s a look at several stocks that could experience big short squeezes when they report earnings this week.
 

Dell

My first earnings short-squeeze play today is computer hardware player Dell (DELL), which is set to report results on Tuesday market the market close. Wall Street analysts, on average, expect Dell to report revenue of $14.66 billion on earnings of 34 cents per share.

During the last quarter, this company missed Wall Street estimates by 3 cents per share, after reporting a net income of 43 cents per share vs. estimates of 46 cents per share. Dell fell in line with Wall Street expectations in the fourth quarter of the last fiscal year.

The current short interest as a percentage of the float for Dell is notable at 3%. That means that out of the 1.47 billion shares in the tradable float, 44.03 million shares are sold short by the bears. This isn’t a huge short interest, but it’s a ton of total shares sold short by the bears. If DELL can give the bulls what they’re looking for, then we could see a solid short squeeze develop post-earnings.

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From a technical perspective, DELL is currently trading above its 50-day moving average and below its 200-day moving average, which is neutral trendwise. This stock gapped down in May from over $15 to $12.31 a share on heavy volume. Following that gap down, shares of DELL have trended sideways between $11.40 and $12.73 a share. A move outside of that sideways trading pattern post-earnings will likely setup the next major trend for DELL.

If you’re bullish on DELL, then I would wait until after they report and look for long-biased trades if this stock can manage to break out above some near-term overhead resistance at $12.44 to $12.73 a share with high volume. Look for volume on that move that hits near or above its three-month average action of 20,355,900 shares. If we get that action, then DELL will have a great chance of re-filling some of that previous gap and heading towards $15 a share or higher.

I would simply avoid DELL or look for short-biased trades if after earnings it fails to trigger that breakout, and then drops below some near-term support at $12 a share with heavy volume. If we get that move, then DELL will setup to re-test and possibly take out some major support levels at $11.39 to $11.34 a share.

Dell was included on a recent list of 10 Profitable and Oversold Stocks Ready to Move Higher.

Fabrinet

Another earnings short-squeeze trade idea is semiconductor player Fabrinet (FN), which is set to release its numbers on Monday after the market close. This company provides precision optical, electro-mechanical and electronic manufacturing services to original equipment manufacturers of complex products, such as optical communication components, modules and sub-systems. Wall Street analysts, on average, expect Fabrinet to report revenue of $141.5 million on earnings of 26 cents per share.

The current short interest as a percentage of the float for Fabrinet stands at 7.1%. That means that out of the 34.47 million shares in the tradable float, 1.54 million shares are sold short by the bears. The bears have also been increasing their bets from the last reporting period by 3.8%, or by about 56,000 million shares. If the bears are caught leaning too hard into this quarter, then we could easily see an explosive short-squeeze develop post-earnings.

From a technical perspective, FN is currently trading above its 50-day moving average and below its 200-day moving average, which is neutral trendwise. This stock has been trending inside of a sideways trading pattern for the last four months, with shares moving between $10.19 on the downside and $13.50 on the upside. A move outside of that sideways trading pattern post-earnings will likely setup the next major trend for FN.

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If you’re in the bull camp on FN, then I would wait until after they report and look for long-biased trades if this stock manages to trigger a break out above some near-term overhead resistance levels at $13.20 to $13.50 a share, and then above its 200-day moving average of $14.67 a share with high volume. Look for volume on that move that hits near or above its three-month average action of 141,809 shares. If we get that move, FN will have a great chance or re-testing and possibly taking out its next major overhead resistance level at $17.08 a share.

I would simply avoid FN or look for short-biased trades if after earnings this stock fails to trigger that breakout, and then moves back below its 50-day moving average of $12.07 a share and some more near-term support at $11.40 a share with heavy volume. If we get that move, then FN will setup to re-test and possibly take out its next major support levels at $10.90 to $10.19 a share post-earnings.

Urban Outfitters

One potential earnings short-squeeze trade is retail apparel player Urban Outfitters (URBN), which is set to release numbers on Monday after the market close. This lifestyle specialty retail company operates under the Urban Outfitters, Anthropologie, Free People, Terrain and BHLDN brands. Wall Street analysts, on average, expect Urban Outfitters to report revenue of $671.58 million on earnings of 33 cents per share.

During the last quarter, this company reported a profit of 23 cents per share vs. Wall Street estimates of 20 cents per share. During the fourth quarter, this company missed Wall Street expectations by 3 cents per share.

The current short interest as a percentage of the float for Urban Outfitters is rather high at 9.2%. That means that out of the 106.57 million shares in the tradable float, 9.95 million shares are sold short by the bears. This is a relatively high short interest on a stock with a pretty low tradable float. Any bullish earnings news for URBN could easily spark a sizeable short-squeeze post-earnings.

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From a technical perspective, URBN is currently trading above both its 50-day and 200-day moving averages, which is bullish. This stock triggered a breakout trade back in July once it cleared some overhead resistance levels at $26.68 to $28.89 a share with high volume. Following that breakout, shares of URBN ran up to a recent high of $31.81 a share. That move has now pushed URBN within range of triggering another major breakout trade post-earnings.

If you’re bullish on URBN, then I would wait until after they report and look for long-biased trades if this stock can manage to break out above some near-term overhead resistance at $31.39 to $31.81 a share with high volume. Look for volume on that move that hits near or above its three-month average volume of 2,565,980 shares. If we get that move, then look for URBN to re-test and possibly take out its next significant overhead resistance level at $33.90 a share post-earnings.

I would avoid URBN or look for short-biased trades if after earnings it fails to trigger that breakout, and then drops below some near-term support at $30 a share, and also its 50-day moving average of $29.16 a share with heavy volume. If we get that action, then URBN will setup to re-test and possibly take out its 200-day moving average of $28 a share post-earnings.

Raven Industries

Another possible earnings short-squeeze trade is fabricated plastic and rubber player Raven Industries (RAVN), which is set to release numbers on Tuesday before the market open. This company manufactures various products for industrial, agricultural, energy, construction and military/aerospace markets primarily in North America. Wall Street analysts, on average, expect Raven Industries to report revenue of $101.41 million on earnings of 38 cents per share.

During the last quarter, this company reported revenue of $117.9 million, and GAAP reported sales were 16% higher than the prior-year quarter’s $105.5 million. Also during the last quarter, Raven reported earnings per share of 52 cents, which was 21% higher than the prior-year quarter’s earnings of 43 cents per share.

The current short interest as a percentage of the float for Raven Industries sits at 3.7%. That means that out of the 106.57 million shares in the tradable float, 9.95 million shares are sold short by the bears. The bears have also been increasing their bets from the last reporting period by 4.2%, or by about 52,000. If the bears are caught leaning too hard into this quarter, then we could easily see a decent short-covering rally post-earnings.

From a technical perspective, RAVN is currently trading above its 200-day moving average and below its 50-day moving average, which is neutral trendwise. This stock has recently sold off from $37.73 to its recent low of $31.28 a share. During that selloff, shares of RAVN has been making mostly lower highs and lower lows, which is bearish technical price action. That said, the stock has also held around its 200-day moving average of $31.73 a share off this recent selloff.

If you’re in the bull camp on RAVN, then I would look for long-biased trades after earnings if this stock manages to trigger a near-term break out above some overhead resistance levels at $33.13 a share, and then above its 50-day moving average of $34.01 a share with high volume. Look for volume on that move that hits near or above its three-month average action of 97,947 shares. If we get that move, then look for RAVN to hit to re-test and possibly take out its next significant overhead resistance levels at $34.61 to $35.16 a share post-earnings.

I would simply avoid RAVN or look for short-biased trades after earnings the stock fails to trigger that breakout, and then moves back below some near-term support at $31.28 a share with high volume. If we see that move, then RAVN could drop dramatically towards its next significant support level at $28.50 a share post-earning.

Express

My final earnings short-squeeze play today is retail apparel player Express (EXPR), which is set to release numbers on Wednesday before the market open. This company is a specialty apparel and accessory retailer offering both women's and men's merchandise. Wall Street analysts, on average, expect Express to report revenue of $467.43 on earnings of 17 cents per share.

If you’re looking for a beaten-down heavily-shorted stock ahead of its earnings report this week, then make sure to check out shares of Express. This stock has been hammered by the sellers during the last six months, with shares off by over 25%. This stock is currently trading just two points off its 52-week low of $15.34 a share as we approach its earnings report.

The current short interest as a percentage of the float for Express is notable at 8.9%. That means that out of the 84.44 million shares in the tradable float, 7.6 million are sold short by the bears. This is a decent short interest on a stock with a relatively low float. Any bullish earnings news from EXPR could easily send this stock soaring post-earnings.

From a technical perspective, EXPR is currently trading below both its 50-day and 200-day moving averages, which is bearish. This stock topped out at around $18.90 a share in July and subsequently dropped to its recent low of $15.34 a share. During that sharp move lower, shares of EXPR were consistently making lower highs and lower lows, which is bearish technical price action. That said, the stock has found buying interest at around $15.34 to $15.49 a share, and it’s now ripped higher towards its current price of $17 a share.

If you’re bullish on EXPR, then I would wait until after they report earnings and look for long-biased trades if it can manage to trigger a breakout trade above its 50-day moving average of $17.27 a share with high volume. If we get that action, then look for EXPR to re-test and possibly take out its next significant overhead resistance levels at $18.97 to $19.42 a share post-earnings. Any move above $19.42 will give EXPR a chance to re-fill some of a previous gap down that started at $23 a share.

I would simply avoid EXPR after earnings if it fails to trigger that breakout, and then moves back below some major near-term support at $15.34 a share with heavy volume. If we get that move, then look for EXPR to re-test and possibly take out its next significant support levels at $14 to $13.06 a share post-earnings. Keep in mind that any move below $15.34 will mean EXPR is trading at a new 52-week low, which is bearish technical price action.

To see more potential earnings short squeeze plays, check out the Earnings Short Squeeze Plays portfolio on Stockpickr.

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-- Written by Roberto Pedone in Winderemere, Fla.

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.