Stock Quotes in this Article: AF, GCOM, PMFG, SHFL, UNFI

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 Under $10 Poised for 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 Big Stocks Set to Slingshot Higher

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.

 

Shuffle Master

My first earnings short-squeeze trade idea today is casinos and gaming player Shuffle Master (SHFL), which is set to release numbers on Monday after the market close. Wall Street analysts, on average, expect Shuffle Master to report revenue of $67.93 million on earnings of 20 cents per share.

Just recently, Brean Murray said that investors concern regarding Shuffle Master’s electronic table systems segment has created a buying opportunity before its third-quarter results. The firm thinks the concerns are overblown since the segment only makes up 10% of revenue and 6% of profits. Brean has a buy rating on the stock and a $19 price target.

>>5 Stocks Everyone Hates -- But You Should Love

The current short interest as a percentage of the float for Shuffle Master is notable at 4.1%. That means that out of the 54.51 million shares in the tradable float, 2.25 million shares are sold short by the bears. If it can deliver the earnings news the bulls are looking for, then we could easily see a large short-squeeze develop post-earnings.

From a technical perspective, SHFL is currently trading above both its 50-day and 200-day moving averages, which is bullish. For the past two months, shares of SHFL have been trading in a sideways trading pattern between $13 on the downside and $15.84 on the upside. A move outside of that range post-earnings will likely setup the next major trend for SHFL.

If you’re bullish on SHFL, then I would wait until after it reports earnings and look for long-biased trades if it can break out above some overhead resistance levels at $15.84 to $16.18 a share with high volume. Look for volume on that move that registers near or above its three-month average volume of 482,809 shares. If that breakout triggers, then look for SHFL to re-test or possibly take out its next major overhead resistance levels at $17.90 to $18.37 a share.

I would simply avoid SHFL or look for short-biased trades if after earnings it fails to trigger that breakout, and then drops below some near-term support at $14.49 to $14.23 a share with high volume. If we get that move, then look for SHLF to re-test and possibly take out its next major support levels at $13.14 to $12.45 a share.

Globecomm Systems

Another potential earnings short-squeeze play is satellite-based managed network solutions provider Globecomm Systems (GCOM), which is set to release its numbers on Tuesday after the market close. Wall Street analysts, on average, expect Globecomm to report revenue of $99.17 million on earnings of 20 cents per share.

The current short interest as a percentage of the float for Globecomm is rather high at 11.3%. That means that out of the 20.25 million shares in the tradable float, 2.45 million shares are sold short by the bears. The bears have also been increasing their bets from the last reporting period by 16.6%, or by about 348,000 shares. If the bears are caught leaning too hard into this quarter, then we could easily see a monster short-squeeze develop post-earnings.

>>4 Tech Stocks Set to Shine

From a technical perspective, GCOM 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 two months, with shares ripping from a low of $9.44 to its current price of around $12.60 a share. During that uptrend, shares of GCOM have consistently made higher lows and higher highs, which is bullish technical price action.

If you’re in the bull camp on GCOM, then I would wait until after it reports earnings and look for long-biased trades if this stock can manage to maintain its trend above its 200-day moving average of $12.62 with high volume. Look for volume on that move that registers near or above its three-month average action of 133,861 shares. If GCOM can hold that trend, then this stock has a great chance of re-testing or possibly taking out its next major overhead resistance levels at $14.37 to $15 a share post-earnings.

I would simply avoid GCOM or look for short-biased trades if after earnings this stock fails to hold a trend above its 200-day, and then trades below some near-term support at $11.50 to $11.17 a share with heavy volume. If we get that action, then look for GCOM to re-test and possibly take out its 50-day moving average of $10.89 a share. If that 50-day gets taken out, then some possible downside targets at $10 to $9.50 a share.

Astoria Financial

A potential earnings short-squeeze trade in the banking complex is Astoria Financial (AF), which is set to release numbers on Monday after the market close. Astoria provides various banking and financial products and services in the U.S. Wall Street analysts, on average, expect Astoria Financial to report revenue of $87.33 million on earnings of 14 cents per share.

This stock has been trending bullishly so far in 2012, with shares up over 20%. As we approach its earnings report, this stock is trading just a few cents off entering new 52-week-high territory.

>>5 Technical Trades Under $10

The current short interest as a percentage of the float for Astoria Financial is pretty high at 13.7%. That means that out of the 67.73 million shares in the tradable float, 11.53 million shares are sold short by the bears. This is a large short interest on a stock with a relatively low float. Any bullish earnings news could easily spark a solid short-covering rally post-earnings.

From a technical perspective, AF 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 two months, with shares consistently making higher lows and higher highs, which is bullish technical price action. That move has now pushed AF within range of breaking out and making new 52-week highs post-earnings.

If you’re bullish on AF, then I would wait until after it reports earnings and look for long-biased trades if this stock can manage to print a new 52-week high above $10.59 a share with high volume. Look for volume on that move that registers near or above its three-month average action of 540,062 shares. If we get that move, then look for AF to re-test or possibly take out its next major overhead resistance levels at $13 to $14 a share.

I would avoid AF or look for short-biased trades if after earnings it fails to trigger that breakout, and then moves back below some near-term support levels at $10.20 to $10 a share with heavy volume. If we get that action, then look for AF to re-test or possibly take out its 50-day moving average of $9.78 a share. If that 50-day gets taken out, then target a possible drop back towards its 200-day moving average of $9.08 a share post-earnings.

United Natural Foods

Another potential earnings short-squeeze trade is United Natural Foods (UNFI), which is set to release numbers on Tuesday before the market open. This company is a distributor of natural, organic and specialty foods and non-food products in the U.S. and Canada. Wall Street analysts, on average, expect United Natural Foods to report revenue of $1.32 billion on earnings of 51 cents per share.

This stock has been on fire so far in 2012, with shares up over 50%. As I write this, shares of United Natural Foods are entering new 52-week-high territory, which is bullish technical price action.

The current short interest as a percentage of the float for United Natural Foods stands at 4.7%. That means that out of the 46.52 million shares in the tradable float, 2.17 million shares are sold short by the bears. This isn’t a huge short interest, but it’s more than enough to spark a solid short-covering rally if it can deliver the earnings news the bulls are looking for.

From a technical perspective, UNFI is currently trading above both its 50-day and 200-day moving averages, which is bullish. This stock has been uptrending extremely strong for the past six months, with shares soaring from a low of $44.67 to its current price of around $60.44 a share. During that uptrend, shares of UNFI have consistently been making higher lows and higher highs, which is bullish technical price action.

If you’re in the bull camp on UNFI, then I would wait until after earnings and look for long-biased trades if the stock manages to print a new 52-week high with heavy volume. Look for volume on that move that hits near or above its three-month average action of 285,647 shares. If we get that action, then UNFI has a great chance of heading north of $70 a share post-earnings.

I would simply avoid UNFI or look for short-biased trades if after earnings the stock fails to hit a new 52-week high and then moves back below some near-term support at $57 a share with high volume. If we get that move, then look for UNFI to re-test or possibly take out its 50-day moving average of $55.01 a share. If UNFI takes out its 50-day, then this stock could trade back towards its next significant support levels at $53 to $50 a share post-earnings.

PMFG

My final earnings short-squeeze trade idea today is scientific and technical instrument player PMFG (PMFG), which is set to release numbers on Wednesday before the market open. This company is a provider of custom-engineered systems and products designed to help ensure that the delivery of energy is safe, efficient and clean. Wall Street analysts, on average, expect PMFG to report revenue of $38.56 million on earnings of 6 cents per share.

The current short interest as a percentage of the float for PMFG is decent at 5.8%. That means that out of the 14.73 million shares in the tradable float, 846,000 are sold short by the bears. Due to the extremely low float and decent short interest for PMFG, we could get a big short-squeeze post-earnings if it can deliver what the bulls are looking for.

From a technical perspective, PMFG is currently trading below both its 50-day and 200-day moving averages, which is bearish. This stock recently plunged from its April high of $14.71 to its July low of $7.26 a share. During that sharp move lower, shares of PMFG were consistently making lower highs and lower lows, which is bearish technical price action. That said, this stock has started to trend sideways during the last month between $6.90 on the downside and $9.33 on the upside. A move outside of that range post-earnings will likely setup the next major trend for PMFG.

If you’re bullish on PMFG, then I would wait until after it reports earnings and look for long-biased trades if it can manage to trigger a break out above some near-term overhead resistance at $7.22 to $8.07 a share with high volume. Look for volume on that move that hits near or above its three-month average volume of 93,372 shares. If we get that action, then PMFG will have a great chance of re-testing or possibly taking out its next major overhead resistance levels at $8.71 to $9.33 a share post-earnings. Any high-volume move above $9.33 could setup PMFG to head well north of $10 a share.

I would simply avoid PMFG or look for short-biased trades after earnings if it fails to trigger that breakout, and then moves back below major near-term support at $6.90 a share with heavy volume. If we get that move, then PMFG will enter new 52-week low territory, which is bearish technical price action. This stock could hit $6 to $5 a share if it starts to print new 52-week lows 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.