Stock Quotes in this Article: AA, ANGO, HST, PGR, RT

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.

 

Host Hotels and Resorts

My first earnings short-squeeze trade idea today is real estate investment trust Host Hotels and Resorts (HST), which is set to release numbers on Wednesday before the market open. Wall Street analysts, on average, expect the company to report revenue of $1.21 billion on earnings of 21 cents per share.

Host Hotels and Resorts has reported quarterly earnings results that have topped Wall Street estimates for the last three quarters in a row. During the last quarter, it reported a profit of 34 cents per share vs. Wall Street estimates of 33 cents per share. This company is looking to extend its trend of revenue increases to its fourth-straight quarter heading into its report.

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The current short interest as a percentage of the float for Host Hotels and Resorts stands at 7.9%. That means that out of the 709.68 million shares in the tradable float, 55.63 million shares are sold short by the bears.

From a technical perspective, HST is currently trading above its 200-day moving average and just below its 50-day moving average, which is neutral trendwise. This stock has sold off recently from its high of $17.48 right to its 200-day moving average of $15.61 a share. During that selloff, shares of HST have been making lower highs and lower lows, which is bearish technical price action. That said, if HST can manage to hold its trend above its 50-day and 200-day, then it could setup to breakout post-earnings.

If you’re bullish on HST, then I would wait until after its report and look for long-biased trades once it manages to break out above some near-term overhead resistance levels at $16.25 to $16.67 a share with high volume. Look for volume on that move that hits near or above its three-month average action of 7.2 million shares. If that breakout triggers, then look for HST to re-test and possibly take out its next significant overhead resistance levels at $17.48 to $19.43 a share.

I would simply avoid HST or look for short-biased trades if after earnings it fails to trigger that breakout and then drops below some near-term support at $15.52 to $15 a share with heavy volume. If we get that move, then HST will setup to re-test or possibly take out its next major support levels at $14.25 to $13.90 a share.

Progressive

Another potential earnings short-squeeze trade is insurance holding company Progressive (PGR), which is set to release its numbers on Wednesday before the market open. Wall Street analysts, on average, expect Progressive to report revenue of $4.17 billion on earnings of 26 cents per share.

This stock has been uptrending modestly strong so far in 2012, with shares up around 12%. As we approach its earnings report, shares of Progressive are trading just two points off its 52-week high of $23.41 a share.

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The current short interest as a percentage of the float for Progressive sits at 5.4%. That means that out of the 555.69 million shares in the tradable float, 29.85 million shares are sold short by the bears. The bears have also been increasing their bets from the last reporting period by 5.8%, or by about 1.64 million shares. If the shorts are caught leaning too hard into this quarter, then we could see a decent short-squeeze setup post-earnings.

From a technical perspective, PGR is currently trading above both its 50-day and 200-day moving averages, which is bullish. This stock has been uptrending rather strong for the last two months, with shares trading from a low of $19.34 to its recent high of $21.94 a share. During that uptrend, shares of PGR have been mostly making higher lows and higher highs, which is bullish technical price action. That move has now pushed PGR within range of triggering a breakout trade post-earnings.

If you’re in the bull camp on PGR, then I would wait until after its report and look for long-biased trades if this stock can manage to break out above some past overhead resistance levels at $22.23 to $23.41 a share with high volume. Look for volume on that move that registers near or above its three-month average volume of 4.6 million shares. If PGR triggers that breakout, then look for this stock to head north of $25 a share post-earnings.

I would simply avoid PGR or look for short-biased trades if after earnings this stock fails to trigger that breakout, and then drops back below its 200-day moving average at $20.92 a share with high volume. If we get that move, then FDO will setup to-re-test or possibly take out its 50-day moving average of $20.19 a share.

Ruby Tuesday

An earnings short-squeeze play in the restaurant complex is Ruby Tuesday (RT), which is set to release numbers on Wednesday after the market close. This company, together with its subsidiaries, owns, develops, operates, and franchises casual dining restaurants. Wall Street analysts, on average, expect Ruby Tuesday to report revenue of $331.52 million on earnings of 6 cents per share.

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This stock has been doing absolutely nothing heading into its report, with shares basically flat on the year up 2.75%. The current short interest as a percentage of the float for Ruby Tuesday is notable at 6.3%. That means that out of the 52.79 million shares in the tradable float, 3.78 million shares are sold short by the bears. That’s more than enough shorts to get the stock juiced to the upside if Ruby Tuesday can give the bulls the news their looking for.

From a technical perspective, RT is currently trading below its 200-day moving average and above its 50-day moving average, which is neutral trendwise. This stock tagged a low of $4.98 in July and has since then trended up to its recent high of $7.69 a share. During that spike higher, shares of RT went on to make mostly higher lows and higher highs, which is bullish technical price action. That move now has RT trading within range of triggering a near-term breakout trade post-earnings.

If you’re bullish on RT, 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 levels at $7.56 to $7.69 a share with high volume. Look for volume on that move that tracks in at near or above its three-month average volume of 455,083 shares. If RT can trigger that move, then this stock will setup to re-test or possibly take out its next significant overhead resistance levels at $9.39 to $11 a share.

I would avoid RT or look for short-biased trades if after earnings it fails to trigger that breakout, and then drops back below its 50-day at $6.92 a share with high volume. If we get that action, then RT will setup to re-test and possibly take out its next significant support level at $6.58 a share. Any high-volume move below $6.58 could send RT well below $6 a share.

AngioDynamics

Another earnings short-squeeze play is AngioDynamics (ANGO), which is set to release numbers on Monday after the market close. This company designs, manufactures, and sells medical, surgical and diagnostic devices. Wall Street analysts, on average, expect AngioDynamics to report revenue of $84.35 million on earnings of 9 cents per share.

The current short interest as a percentage of the float for AngioDynamics is notable at 5.9%. That means that out of the 22.71 million shares in the tradable float, 1.47 million shares are sold short by the bears. The bears have also been increasing their bets from the last reporting period by 10%, or by about 133,000 shares. If the bears are caught leaning too hard into this quarter, then we could see a solid short-squeeze setup for ANGO.

From a technical perspective, ANGO 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 three months, with shares soaring from a low of $10.34 to its recent high of $12.91 a share. During that sharp move higher, shares of ANGO have been consistently making higher lows and higher highs, which is bullish technical price action. That move has now pushed ANGO within range of triggering a near-term breakout trade post-earnings.

If you’re bullish on ANGO, 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 $12.91 a share with high volume. Look for volume on that move that hits near or above its three-month average action of 147,682 shares. If ANGO can trigger that move, then look for this stock to re-test or possibly take out its next major overhead resistance levels $13.67 to $14.80 a share.

I would avoid ANGO or look for short-biased trades if after earnings it fails to trigger that breakout, and then drops below some near-term support levels at $12.20 to $12 a share with high volume. If we get that action, then ANGO will setup to re-test or possibly take out its 50-day moving average of $11.54 a share. Any high-volume move below $11.54 could send ANGO back below $10 a share post-earnings.

Alcoa

My final earnings short-squeeze play today is Alcoa (AA), which is set to release numbers on Tuesday after the market close. This company is engaged in the production and management of primary aluminum, fabricated aluminum and alumina combined, through its participation in technology, mining, refining, smelting, fabricating and recycling. Wall Street analysts, on average, expect Alcoa to report revenue of $5.57 billion on earnings of one cent per share.

This company reported in line results last quarter after topping Wall Street earnings in the prior quarter. Revenue rose 21.4% in the third quarter of the last fiscal year, 6% in the fourth quarter of the last fiscal year and 0.8% in the first quarter before dropping in the second quarter.

The current short interest as a percentage of the float for Alcoa is rather high at 7.7%. That means that out of the 1.07 billion shares in the tradable float, 82.18 million shares are sold short by the bears. The bears have also been increasing their bets from the last reporting period by 2.5%, or by about 2.03 million shares.

From a technical perspective, AA is currently trading above its 50-day and just below 200-day, which is neutral trendwise. This stock recently sold off from its high of $9.93 a share right to its 50-day moving average of $8.86 a share. That move has now pushed AA within range of triggering a near-term breakout trade post-earnings.

If you’re in the bull camp on AA, 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 $9.34 to $9.83 a share with high volume. Look for volume on that move that registers near or above its three-month average action of 19.1 million shares. If we get that move, then AA will setup to re-test or possibly take out its next significant overhead resistance levels at $10.17 to $10.85 a share. Any high-volume move above $10.85 will setup AA to re-test $11.52 to $12 a share.

I would simply avoid AA or look for short-biased trades if after earnings it fails to trigger that breakout and then moves back below its 50-day at $8.86 a share with high volume. If we get that move, then AA will set up to re-test or possibly take out its next major support levels at $8.39 to $7.94 a share.

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.