Stock Quotes in this Article: AVAV, GIII, HITK, FRAN, TEA

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.

>>5 Stocks Poised for Big Breakouts

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.

>>5 Rocket Stocks Worth Buying This Week

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 earnings short-squeeze trade idea today is aerospace and defense player AeroVironment (AVAV), which is set to report results on Wednesday after the market close. This company engages in the design, development, production, support and operation of unmanned aircraft systems and efficient energy systems for various industries and governmental agencies. Wall Street analysts, on average, expect AeroVironment to report revenue of $62.54 million on a loss of 3 cents per share.

AeroVironment has been hammered by the bears so far in 2012, with shares down by over 23%.

>>Top 5 Bargain Stocks in the S&P 500

The current short interest as a percentage of the float for AeroVironment stands at 6.1%. That means that out of the 19.01 million shares in the tradable float, 1.16 million shares are sold short by the bears. This is a decent short interest on a stock with a very low tradable float. If the bulls hear the news they’re looking for, then AVAV could short-squeeze big post-earnings.

From a technical perspective, AVAV is currently trading below both its 50-day and 200-day moving averages, which is bearish. This stock has dropped sharply from its June high of $27.82 to its recent low of $21.97 a share. During that slide, shares of AVAV made lower highs and lower lows, which is bearish technical price action. After that drop, shares of AVAV have started to trend sideways between $23 and $24.88 a share. A move outside of that sideways trading pattern post-earnings will likely setup the next major trend for AVAV.

If you’re bullish on AVAV, then I would wait until after its report and look for long-biased trades if this stock can manage to break out above some near-term overhead resistance at $24.88 a share with high volume. Look for volume on that move that registers near or above its three-month average volume of 192,288 shares. If we get that action, then AVAV will have a great chance of re-testing or possibly taking out its next major overhead resistance levels at $26.48 to $27.82 a share post-earnings.

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 near-term support at $23.02 a share with heavy volume. If we get that move, then AVAV will setup to re-test and possibly take out its next major support areas at $21.97 to $21.14 a share. Keep in mind that any move below $21.14 should be considered bearish price action since it will push AVAV into new 52-week low territory.

G-III Apparel Group

Another earnings short-squeeze play is apparel player G-III Apparel Group (GIII), which is set to release its numbers on Wednesday before the market open. This company designs, manufactures and markets a range of apparel, including outerwear, dresses, sportswear, women’s suits and women’s performance wear, as well as luggage and women’s handbags, small leather goods and cold weather accessories. Wall Street analysts, on average, expect G-III Apparel Group to report revenue of $254.10 million on earnings of 7 cents per share.

G-III Apparel Group has been ripping higher so far in 2012, with shares up over 25%. Shares of G-III Apparel Group are currently trading just one point off its 52-week high of $32.34 a share as we near its report.

>>5 Stocks Under $10 Set to Soar Higher

The current short interest as a percentage of the float for G-III Apparel Group is pretty high at 12.5%. That means that out of the 13.14 million shares in the tradable float, 2.05 million shares are sold short by the bears. This is a decent short interest on a stock with a very low tradable float. If the bulls get the news they’re looking for, then GIII could easily explode higher post-earnings as the shorts rush to cover some of their positions.

From a technical perspective, GIII is currently trading above both its 50-day and 200-day moving averages, which is bullish. This stock has been uptrending strong since early August, with shares soaring from $23.04 to $32.34 a share. During that uptrend, shares of GIII have consistently made higher lows and higher highs, which is bullish technical price action. That move has now pushed GIII within range of printing new 52-week highs post-earnings.

If you’re in the bull camp on GIII, then I would wait until after its report and look for long-biased trades if this stock manages to trigger a breakout to a new 52-week high above $32.34 a share with heavy volume. Look for volume on that move that hits near or above its three-month average action of 124,838 shares. If we get that action, then GIII could easily re-test or take out its next significant overhead resistance level at $38.95 a share post-earnings.

I would simply avoid GIII or look for short-biased trades if after earnings this stock fails to trigger that breakout, and then moves back below some near-term support at $29 to $28 a share with heavy volume. If we get that move, then GIII will setup to re-test and possibly take out its 50-day moving average of $26.58 a share post-earnings.

Hi-Tech Pharmacal

One potential earnings short-squeeze play in the biotechnology and drugs complex is Hi-Tech Pharmacal (HITK), which is set to release numbers on Wednesday before the market open. This company is a specialty manufacturer and marketer of prescription, over-the-counter and nutritional products. Wall Street analysts, on average, expect Hi-Tech Pharmacal to report revenue of $57.56 million on earnings of 68 cents per share.

The current short interest as a percentage of the float for Hi-Tech Pharmacal is sits at 4.9%. That means that out of the 10.58 million shares in the tradable float, 509,000 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-covering rally post-earnings if the bulls get the news they’re looking for.

From a technical perspective, HITK is currently trading above both its 50-day and 200-day moving averages, which is bullish. This stock has been on a tear during the last two months, with shares soaring from a low of $27.35 to a recent high of $36.27 a share. During that sharp spike higher, shares of HITK have consistently made higher lows and higher highs, which is bullish technical price action. That move has now pushed HITK within range of triggering a near-term breakout trade post-earnings.

If you’re bullish on HITK, then I would wait until after they report and look for long-biased trades if this stock can manage to take out some near-term overhead resistance levels at $36.27 to $36.49 a share with high volume. Look for volume on that move that registers near or above its three-month average action of 92,196 shares. If we get that move, then HITK will setup to re-test and possibly take out its next overhead resistance level at $38.16 a share. If $38.16 gets taken out with volume, then HITK could trend back towards $40 to $43 a share post-earnings.

I would avoid HITK or look for short-biased trades if after earnings it fails to trigger that breakout, and then drops below some near-term support at $34.53 a share with heavy volume. If we get that action, then HITK could easily take out its 50-day moving average of $33.21 a share, and then drop lower towards $30 to $29 a share post-earnings.

Teavana

One possible earnings short-squeeze play is specialty retail player Teavana (TEA), which is set to release numbers on Tuesday after the market close. This company is a retailer of loose-leaf teas, authentic artisanal teawares and other tea-related merchandise. Wall Street analysts, on average, expect Teavana to report revenue of $40.50 million on earnings of 2 cents per share.

Teavana has been destroyed by the sellers during 2012, with shares down by over 40%. Its current short interest as a percentage of the float is extremely high at 24.3%. That means that out of the 3.02 million shares in the tradable float, 2.34 million shares are sold short by the bears. This is heavily-shorted stock with a ridiculously low float. Any bullish news out of Teavana could spark a monster short-squeeze post-earnings.

From a technical perspective, TEA is currently trading below both its 50-day and 200-day moving averages, which is bearish. This stock has been slammed the bears during the last four months, with shares dropping from $22.58 to $10.75 a share. During that plunge, shares of TEA have consistently made lower highs and lower lows, which is bearish price action. That said, shares of TEA have started to trend sideways during the last month between $10.75 and $12.47 a share. A move outside of that sideways trading pattern post-earnings will likely setup the next major trend for TEA.

If you’re in the bull camp on TEA, then I would look for long-biased trades after earnings if this stock manages to trigger breakout trade above some near-term overhead resistance levels at $11.98 to $12.47 a share with high volume. Look for volume on that move that hits near or above its three-month average action of 166,865 shares. If we get that move, then TEA will setup to re-test and possibly take out its next major overhead resistance levels at $14.22 to $14.49 a share. A move above $14.49 will give TEA the chance to re-fill a previous gap down that started at around $17 a share.

I would simply avoid TEA or look for short-biased trades after earnings if the stock fails to trigger that breakout and then moves back below some major near-term support areas at $11.03 to $10.75 a share with high volume. If we get that action, then TEA will enter new 52-week low territory, which is bearish technical price action.

Francesca’s

My final earnings short-squeeze play is retail apparel player Francesca’s (FRAN), which is set to release numbers on Tuesday after the market close. This company operates a chain of retail boutiques under the Francesca’s collections brand in the U.S. Its retail boutiques offer apparel, jewelry, accessories and gifts to female customers. Wall Street analysts, on average, expect Francesca’s to report revenue of $60.36 million on earnings of 17 cents per share.

Francesca’s has been skyrocketing so far in 2012, with shares up over 108%. This stock is trending so strong, that as I write this FRAN has hit a new all-time high at $37.09 a share.

The current short interest as a percentage of the float for Francesca’s is extremely high at 17.5%. That means that out of the 34.65 million shares in the tradable float, 5.96 million are sold short by the bears. Any bullish earnings news from FRAN could easily spark a solid short-covering rally post-earnings.

From a technical perspective, FRAN is currently trading above both its 50-day and 200-day moving averages, which is bullish. This stock has been uptrending very strong for the last four months, with shares soaring from $20.93 to $37.09 a share. During that uptrend, shares of FRAN have been consistently making higher lows and higher highs, which is bullish technical price action.

If you’re bullish on FRAN, then I would wait until after its report and look for long-biased trades if this stock manages to print a new all-time high with high volume. Look for volume on that move that registers near or above its three-month average action of 781,286 shares. If we get that action, then look for FRAN to trend north of $40 a share post-earnings.

I would simply avoid FRAN or look for short-biased trades after earnings if it fails to trigger that move, and then moves back below some near-term support at $34 to $33 a share with heavy volume. If we get that action, then FRAN will setup to re-test or possibly take out its 50-day moving average of $30.85 a share 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.


RELATED LINKS:







Follow Stockpickr on Twitter and become a fan on Facebook.

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.