Stock Quotes in this Article: ATU, CMTL, FINL, TXI, ZZ

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 time frame 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 by waiting. That’s why it can be worth betting prior to the report -- but only if the stock is acting technically very bullish and you have a very strong conviction that it is going to rip higher. Just remember that even when you have that conviction and 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 for a heavily shorted stock and then jump in and trade the prevailing trend.

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

Finish Line

My first earnings short-squeeze play today is retail apparel player Finish Line (FINL), which is set to release numbers on Friday before the market open. This mall-based specialty retailer in the U.S. operates two retail divisions under the Finish Line brand name and Running Specialty Group. Wall Street analysts, on average, expect Finish Line to report revenue of $357.27 million on earnings of 44 cents per share.

This stock has been uptrending fairly strong so far in 2012, with shares up around 19%. Shares of Finish Line trading are currently trading about three points off its 52-week high of $26.16 a share ahead of its report. The current short interest as a percentage of the float for Finish Line is notable at 7.2%. That means that out of the 49.19 million shares in the tradable float, 3.53 million shares are sold short by the bears.

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From a technical perspective, FINL 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 three months, with shares soaring from a low of $17.82 to its recent high of $24.90 a share. During that uptrend, shares of FINL have been consistently making higher lows and higher highs, which is bullish technical price action. That move has now pushed FINL within range of triggering a near-term breakout trade.

If you’re bullish on FINL, then I would wait until after its report and look for long-biased trades if it manages to break out some near-term overhead resistance levels at $24 to $24.90 a share with high volume. Look for volume on that move that hits near or above its three-month average action of 707,323 shares. If that breakout hits, then FINL will have a great chance of re-testing or possibly taking out its next major overhead resistance level at $26.16 a share.

I would simply avoid FINL or look for short-biased trades if after earnings it fails to trigger that breakout, and then drops below its 50-day moving average of $22.36 a share with heavy volume. If we get that move, then FINL will setup to re-test or possibly take out its 200-day moving average of $21.58 a share. If FINL takes out its 200-day, then it could easily trend down towards $20 to $19 a share post-earnings.

Actuant

Another potential earnings short-squeeze trade is Actuant (ATU), a global manufacturer and marketer of a range of industrial products and systems. which is set to release its numbers on Thursday before the market open. Wall Street analysts, on average, expect Actuant to report revenue of $409.98 million on earnings of 54 cents per share.

This company has beaten Wall Street estimates for the last four quarters in a row, and it's coming off a quarter in which it topped estimates by 1 cent, after reporting a net income of 60 cents per share vs. estimates of 59 cents per share.

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The current short interest as a percentage of the float for Actuant is pretty high at 9%. That means that out of the 67.37 million shares in the tradable float, 6.03 million shares are sold short by the bears. Any bullish earnings news could easily spark a solid short-covering rally post-earnings.

From a technical perspective, ATU 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 four months, with shares soaring from a low of $24.23 to a recent high of $31.33 a share. During that uptrend, shares of ATU have consistently made higher lows and higher highs, which is bullish technical price action. That move has now pushed ATU within range of triggering a near-term breakout trade.

If you’re in the bull camp on ATU, 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 $31.33 a share with high volume. Look for volume on that move that hits near or above its three-month average action of 552,403 shares. If ATU triggers that breakout, then this stock could tag $35 a share or higher post-earnings.

I would simply avoid ATU or look for short-biased trades if after earnings this stock fails to trigger that breakout, and then drops back below its 50-day moving average at $28.53 a share with high volume. If we get that move, then ATU will setup to re-test or possibly take out its 200-day moving average of $26.85 a share post-earnings.

Comtech Telecomm

One earnings short-squeeze idea is Comtech Telecomm (CMTL), which is set to release numbers on Wednesday after the market close. Comtech designs, develops, produces and markets products, systems and services for communications solutions. Wall Street analysts, on average, expect Comtech Telecomm to report revenue of $109.08 million on earnings of 38 cents per share.

The current short interest as a percentage of the float for Comtech Telecomm is notable at 7.9%. That means that out of the 17.34 million shares in the tradable float, 1.37 million shares are sold short by the bears. This is a decent short interest on a stock with relatively low float. Any bullish earnings news could easily spark a solid short-squeeze post-earnings.

From a technical perspective, CMTL is currently trading above its 50-day moving average and below its 200-day moving average, which is neutral trendwise. This stock has been trading inside of a sideways trading pattern for the last month and a half, with shares moving between $27.62 on the downside and $29.25 on the upside. A move outside of that range post-earnings will likely setup this stock for its next major trend.

If you’re bullish on CMTL, 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 $29.25 a share, and then its 200-day moving average of $29.88 a share with high volume. Look for volume on that move that hits near or above its three-month average action of 89,014 shares. If that breakout triggers for CMTL, then this stock will have a great chance to re-test or possibly take out its next major overhead resistance levels at $31.05 to $31.89 a share.

I would avoid CMTL or look for short-biased trades if after earnings it fails to trigger that breakout, and then moves back below some key near-term support levels at $28.14 to $27.62 a share with heavy volume. If we get that action, then CMTL will setup to re-test or possibly take out its next major support level at $26.27 a share.

Texas Industries

Another potential earnings short-squeeze trade is heavy construction materials supplier Texas Industries (TXI), which is set to release numbers on Wednesday after the market close. Wall Street analysts, on average, expect Texas Industries to report revenue of $186.66 million on a loss of 7 cents per share.

This stock has been uptrending very strong in 2012, with shares up around 40%. This bullish price action has shares of Texas Industries trending just a few points off its 52-week high of $45.68 a share ahead of its report.

The current short interest as a percentage of the float for Texas Industries is very high at 18.6%. That means that out of the 12.63 million shares in the tradable float, 3.88 million shares are sold short by the bears. The bears have also been increasing their bets from the last reporting period by 2.6%, or by about 99,000 shares. If the bears are caught leaning too hard into this quarter, then we could easily see a monster short-squeeze develop post-earnings.

From a technical perspective, TXI is currently trading above both its 50-day and 200-day moving averages, which is bullish. This stock has been trending within a sideways trading pattern for the last two months and change, with shares bouncing between $38.14 on the downside and $45.68 on upside. A move outside of that trading range post-earnings will likely setup the next major trend for TXI.

If you’re in the bull camp on TXI, then I would wait until after its earnings report and look for long-biased trades if this stock manages to break out above some near-term overhead resistance levels at $44.54 to $45.68 a share with high volume. Look for volume on that move that registers near or above its three-month average action of 291,108 shares. If we get that breakout, then TXI will setup to re-test or possibly take out its next major overhead resistance levels at $46.27 to $47.15 a share. If those areas get cleared post-earnings, then TXI will likely trade north of $50 a share.

I would simply avoid TXI 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 $56.32 a share with high volume. If we get that move, then RHT will setup to re-test or possibly take out its 200-day moving average of $52.91 a share post-earnings.

Sealy

My final earnings short-squeeze trade idea is furniture and fixtures player Sealy (ZZ), which is set to release numbers on Thursday after the market close. This company is engaged in the consumer products business and manufacture, distribute and sell conventional bedding products, including mattresses and box springs, as well as specialty bedding products, which include latex and visco-elastic mattresses. Wall Street analysts, on average, expect Sealy to report revenue of $344.21 million on 3 cents per share.

This stock has been uptrending very strong so far in 2012, with shares up over 25%. That strong trend has shares of Sealy trading just 30 cents off its 52-week high of $2.45 a share in front of its earnings report. The current short interest as a percentage of the float for Sealy is extremely high at 27.1%. That means that out of the 34.36 million shares in the tradable float, 13.99 million are sold short by the bears.

From a technical perspective, ZZ is currently trading above both its 50-day and 200-day moving averages, which is bullish. This stock formed a double bottom in early September at around $1.52 to $1.55 a share. Since forming that bottom, shares of ZZ have skyrocketed and hit a recent high of $2.28 a share. That move has now pushed ZZ within range of triggering a major breakout trade post earnings.

If you’re bullish on ZZ, then I would wait until after its report and look for long-biased trades if it can manage to break out above some near-term overhead resistance levels at $2.28 to $2.45 a share with high volume. Look for volume on that move that registers near or above its three-month average action of 491,642 shares. If we get that action, then ZZ will have a great chance of re-testing or possibly taking out its next major overhead resistance levels at $3 to $3.50 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.


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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.