Stock Quotes in this Article: AIR, HDY, MLHR, ASNA, SHF

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 -- 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.

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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.

Ascena Retail Group

My first earnings short-squeeze play today is Ascena Retail Group (ASNA), which is set to release numbers on Wednesday after the market close. Ascena is a national specialty retailer of apparel for women and tween girls, operating through its wholly owned subsidiaries, the dressbarn, maurices and Justice brands. Wall Street analysts, on average, expect Ascena Retail Group to report revenue of $779.66 million on earnings of 29 cents per share.

During the last quarter, this company reported earnings per share of 34 cents, which failed to meet Wall Street estimates of 36 cents per share. Citigroup recently initiated coverage on this stock with a buy rating and a $25 price target. The current short interest as a percentage of the float for Ascena Retail Group is notable at 4.1%. That means that out of the 122.62 million shares in the tradable float, 5.03 million shares are sold short by the bears.

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From a technical perspective, ASNA 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 soaring from a low of $16.99 to a recent high of $21.40 a share. During that uptrend, shares of ASNA have consistently made higher lows and higher highs, which is bullish technical price action. That move has now pushed ASNA within range of triggering a near-term breakout trade.

If you’re bullish on ASNA, then I would wait until after they report earnings and look for long-biased trades if it can break out above some near-term overhead resistance levels at $21.40 to $22.07 a share with high volume. Look for volume on that move that hits near or above its three-month average action of 1.7 million shares. If ASNA can trigger that breakout, then this stock has a great chance of re-testing and possibly taking out its 52-week high of $22.62 post-earnings. We could easily see ASNA hit $25 or higher if it clears its 52-week high with volume.

I would simply avoid ASNA or look for short-biased trades if after earnings it fails to trigger that breakout, and then takes out some near-term support at $20.50 a share with heavy volume. If we get that move, then ASNA will setup to re-test and possibly take out both its 50-day at $19.09 and its 200-day at $18.88 a share post-earnings.

Herman Miller

Another potential earnings short-squeeze trade is Herman Miller (MLHR), which is set to release its numbers on Wednesday after the market close. This company engages in the research, design, manufacture and distribution of office furniture systems, seating, products and related services worldwide. Wall Street analysts, on average, expect Herman Miller to report revenue of $452.07 million on earnings of 39 cents per share.

The current short interest as a percentage of the float for Herman Miller sits at 3.8%. That means that out of the 57.51 million shares in the tradable float, 2.18 million 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 Herman Miller can deliver bullish results.

From a technical perspective, MLHR is currently trading above both its 50-day and 200-day moving averages, which is bullish. This stock has been uptrending strong for the last two months, with shares spiking higher from $15.96 to its recent high of $21.93 a share. During that uptrend, shares of MLHR have been mostly making higher lows and higher highs, which is bullish technical price action. That move has now pushed MLHR within range of triggering a near-term breakout trade.

If you’re in the bull camp on MLHR, then I would wait until after they report earnings and look for long-biased trades if this stock can manage to take out some near-term overhead resistance levels at $21.93 a share with high volume. Look for volume on that move that registers near or above its three-month average action of 271,264 shares. If MLHR can trigger that breakout, then this stock will have a great chance of re-testing or possibly taking out its 52-week high of $23.54 a share post-earnings.

I would simply avoid MLHR or look for short-biased trades if after earnings this stock fails to trigger that breakout, and then drops below some near-term support at $22.50 a share with high volume. If we get that move, then MLHR will setup to re-test or possibly take out its 200-day at $19.72 and its 50-day at $19.08 a share post-earnings.

Schiff Nutrition

Another earnings short-squeeze play is Schiff Nutrition (SHF), which is set to release numbers on Tuesday before the market open. This company develops, manufactures, markets and distributes branded and private-label vitamins, nutritional supplements and nutrition bars in the U.S. and internationally. Wall Street analysts, on average, expect Schiff Nutrition to report revenue of $83.60 million on earnings of 20 cents per share.

This stock has been trending extremely bullish so far 2012, with shares up around 100%. As we approach its earnings report, this stock is trading just 30 cents off its 52-week high of $20.69 a share.

The current short interest as a percentage of the float for Schiff Nutrition stands at 5.8%. That means that out of the 12.48 million shares in the tradable float, 768,145 shares are sold short by the bears. This is a decent short interest on a stock with a very low tradable float. Any bullish earnings news could easily spark a big short-squeeze post-earnings.

From a technical perspective, SHF 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 $11.85 to its recent high of $20.69 a share. During that uptrend, shares of SHF have consistently made higher lows and higher highs, which is bullish technical price action. That move has now pushed SHF within range of triggering a major breakout trade.

If you’re bullish on SHF, then I would wait until after they report earnings and look for long-biased trades if this stock can manage to clear some near-term overhead resistance levels at $20.69 to $20.65 a share with high volume. Look for volume on that move that registers near or above its three-month average action of 44,039 shares. If we get that breakout, then look for SHF to head north of $25 a share post-earnings.

I would avoid SHF or look for short-biased trades if after earnings it fails to trigger that breakout, and then moves back below its 50-day moving average of $19.02 a share with heavy volume. If we get that action, then look for SHF to re-test or possibly take out its next major support levels at $18.69 to $16.47 a share post-earnings.

AAR

A potential earnings short-squeeze trade in the aerospace and defense complex is AAR (AIR), which is set to release numbers on Wednesday after the market close. This company is a diversified provider of products and services to the worldwide aviation and government and defense markets. Wall Street analysts, on average, expect AAR to report revenue of $532.95 on earnings of 38 cents per share.

This company recently announced that it expects fiscal first-quarter earnings and revenue to come in above Wall Street’s expectations. The company said it foresees earnings of 42 cents to 45 cents per share and it anticipates revenue in a range of $540 million to $550 million.

The current short interest as a percentage of the float for AAR sits at 5.9%. That means that out of the 36.49 million shares in the tradable float, 2.24 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 AAR reports a solid quarter and issues bullish forward guidance.

From a technical perspective, AIR is currently trading above both its 50-day and 200-day moving averages, which is bullish. This stock recently broke out above some stiff overhead resistance at $14.44 to $14.74 a share with heavy volume. That move pushed AIR back above its 200-day moving average with strong upside volume flows.

If you’re in the bull camp on AIR, then I would wait until after earnings and look for long-biased trades if the stock can manage to take out some near-term overhead resistance at $17.45 a share with high volume. Look for volume on that move that hits near or above its three-month average action of 456,266 shares. If we get that breakout, then AIR will have a great chance of re-testing its next significant overhead resistance level at $20 to $22.51 a share post-earnings.

I would simply avoid AIR or look for short-biased trades if after earnings the stock fails to trigger that breakout, and then moves back below $16 a share with high volume. If we get that move, then AIR could re-fill some of its previous gap and setup to re-test or possibly take out its 50-day moving average of $14.34 a share.

Hyperdynamics

My final earnings short-squeeze trade idea today is oil and gas operations player Hyperdynamics (HDY), which is set to release numbers on Tuesday at 10 a.m. This company is an oil and gas exploration company with prospects in offshore Republic of Guinea in Northwest Africa. There are currently no Wall Street estimates available for Hyperdynamics.

This stock has performed poorly so far in 2012, with shares down by over 60%. This stock is currently trading just 20 cents off its 52-week low of 56 cents per share. The current short interest as a percentage of the float for Hyperdynamics is rather high at 11.2%. That means that out of the 165.98 million shares in the tradable float, 18.43 million are sold short by the bears.

From a technical perspective, HDY is currently trading above its 50-day moving average and below its 200-day moving average, which is neutral trendwise. This stock has been downtrending badly for the past six months, with shares dropping from over $1.30 to its recent low of 62 cents per share. During that downtrend, shares of HDY have mostly made lower highs and lower lows, which is bearish technical price action.

If you’re bullish on HDY, then I would wait until after they report and look for long-biased trades if it can manage to take out some near-term overhead resistance levels at 83 to 93 cents per share with high volume. Look for volume on that move that hits near or above its three-month average volume of 842,183 shares. If we get that action, then PMFG will have a great chance of re-testing or possibly taking out its next major

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.