Stock Quotes in this Article: CLB, CREE, ISRG, LNN, MLNX

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.

Cree

My first earnings short-squeeze play today is Cree (CREE), a provider of LED products, lighting products and semiconductor products for power and radio-frequency applications, which is set to release numbers on Tuesday after the market close. Wall Street analysts, on average, expect Cree to report revenue of $317.89 million on earnings of 26 cents per share.

Cree is looking to beat Wall Street estimates for the third straight quarter. During the last quarter, Cree reported a profit of 16 cents per share versus estimates of 13 cents per share, and in the previous quarter, the company beat forecasts by 2 cents with a profit of 15 cents per versus estimates of 13 cents per share.

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The current short interest as a percentage of the float for Cree is rather high at 15.5%. That means that out of the 113.34 million shares in the tradable float, 17.62 million shares are sold short by the bears.

From a technical perspective, CREE is currently trading below both its 50-day and 200-day moving averages, which is bearish. During the last month, shares of CREE have been trending sideways between $24.50 and $26 a share. A high-volume move outside of that range post-earnings will likely setup the next major trend for CREE.

If you’re bullish on CREE, 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 $26 to $27.27 a share with high volume. Look for volume on that move that registers near or above its three-month average action of 1,435,600 shares. If that breakout triggers, then look for CREE to re-test or possibly take out its next major overhead resistance at $29.47 a share post-earnings.

I would simply avoid CREE or look for short-biased trades if after earnings it fails to trigger that breakout, and then drops below some near-term levels at $24.50 to $24 a share with heavy volume. If we get that move, then CREE will setup to re-test or possibly take out its next major support levels at $22.25 to $20.25 a share.

Intuitive Surgical

Another potential earnings short-squeeze trade is medical equipment and supplies player Intuitive Surgical (ISRG), which designs, manufactures and markets da Vinci Surgical Systems, EndoWrist instruments and surgical accessories. The company is set to release its numbers on Tuesday after the market close, and Wall Street analysts, on average, expect Intuitive Surgical to report revenue of $534.93 million on earnings of $3.50 per share.

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During the last quarter, this company topped Wall Street estimates by 22 cents, after reporting a profit of $3.75 a share versus estimates of $3.53 a share. That registered the fourth straight quarter where Intuitive Surgical beat Wall Street estimates. For the second quarter, profit jumped 31.9% to $154.9 million from $117.4 million the year earlier. Revenue soared 26% to $536.5 million from $425.7 million.

The current short interest as a percentage of the float for Intuitive Surgical is notable at 5.3%. That means that out of the 39.93 million shares in the tradable float, 2.08 million shares are sold short by the bears. The bears have also been increasing their bets from the last reporting period by 6.4%, or by about 124,000 shares. If the shorts are caught pressing too hard into this quarter, then we could easily see a large short-squeeze kickoff post-earnings.

From a technical perspective, ISRG is currently trading above both its 50-day and 200-day moving averages, which is bullish. This stock has been trending range-bound for the last month and change, with shares moving between $481.26 on the downside and $523.76 on the upside. A high-volume move outside of that range post-earnings will likely set up the next major trend for ISRG.

If you’re in the bull camp on ISRG, 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 $521.63 to $523.76 a share with high volume. Look for volume on that move that hits near or above its three-month average action of 324,922 shares. If ISRG triggers that breakout, then look for the stock to fill some of its gap from back in July that started above $550 a share. This stock could even potentially hit $570 a share post-earnings.

I would simply avoid ISRG 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 of $502.79 a share with high volume. If we get that move, then ISRG will setup to re-test or possibly take out its next major support levels at $489.04 to $481.26 a share. If those levels get taken out with volume, then ISRG will challenge more previous support at $471.04 to $467.26 a share.

Mellanox Technologies

Another potential earnings short-squeeze play is Mellanox Technologies (MLNX), which produces and supplies semiconductor interconnect products that facilitate efficient data transmission between servers, storage systems and communications infrastructure equipment and other embedded systems. Mellanox is set to release numbers on Wednesday after the market close. Wall Street analysts, on average, expect the company to report revenue of $150.07 million on earnings of $1.13 per share.

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Mellanox smashed Wall Street estimates in the first and second quarters off bullish demand for its products, sending shares exploding higher by more than 50% and 40%. On a year-over-year basis, revenue has trended extremely strong registering more than 61% in the first quarter and almost 111% in the second quarter.

The current short interest as a percentage of the float for Mellanox Technologies stands at 7.7%. That means that out of the 35.65 million shares in the tradable float, 2.57 million shares are sold short by the bears. This stock has a decent short interest and a very low tradable float. If the bulls get the news their looking for, then this stock could easily see a sharp short covering rally post-earnings.

From a technical perspective, MLNX is currently trading below its 50-day moving average and well above its 200-day moving average, which is neutral trend-wise. This stock has been trending range bound for the last two months, with shares moving between $94.81 on the downside and $111.98 on the upside. A move outside of that range post-earnings will likely setup the next major trend for MLNX.

If you’re bullish on MLNX, 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 $106.77 to $111.98 a share with high volume. Look for volume on that move that tracks in at near or above its three-month average volume of 1.3 million shares. If MLNX triggers that breakout, then this stock will setup to re-test or possibly take out its next significant overhead resistance level at $120.05 a share. Any move above that level will push MLNX into new 52-week-high territory, which is bullish technical price action.

I would avoid MLNX or look for short-biased trades if after earnings it fails to trigger that breakout, and then drops below some near-term support at $98.34 to $94.81 a share with volume. If we get that action, then MLNX will setup to re-test or possibly take out its next major support level at $85.63 a share. If that level gets taken out with volume, then MLNX could re-fill its previous gap back down towards $65 a share.

Lindsay

Another earnings short-squeeze trade is Lindsay (LNN), a designer and manufacturer of self-propelled center pivot and lateral move irrigation systems used in the agricultural industry, which is set to release numbers on Wednesday before the market open. Wall Street analysts, on average, expect Lindsay to report revenue of $128.99 million on earnings of 76 cents per share.

This stock has been trending very strong so far in 2012, with shares up around 35%. Shares of LNN are now trading about two points off its 52-week high of $74.62 ahead of its report. The current short interest as a percentage of the float for Lindsay is rather high at 12.6%. That means that out of the 12.44 million shares in the tradable float, 1.57 million shares are sold short by the bears.

From a technical perspective, LNN 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 moving up from a low of $64.46 to its recent high of $74.02 a share. During that uptrend, shares of LNN have been mostly making higher lows and higher highs, which is bullish technical price action. That move has now pushed LNN within range of triggering a major breakout trade post-earnings.

If you’re bullish on LNN, 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 $74.02 to $74.50 a share with high volume. Look for volume on that move that hits near or above its three-month average volume of 154,157 shares. If LNN triggers that breakout, then look for this stock to re-test or possibly take out its next major overhead resistance level at $80 to $85.11 a share.

I would avoid LNN or look for short-biased trades if after earnings it fails to trigger that breakout, and then drops back below its 50-day at $70.41 a share with heavy volume. If we get that action, then LNN will setup to re-test or possibly take out its next major support levels at $67.42 to $64.46 a share post-earnings.

Core Laboratories

My final earnings short-squeeze play today is oil well services and equipment player Core Laboratories (CLB), which is set to release numbers on Wednesday after the market close. This company is a Netherlands-based provider of reservoir description, production enhancement and reservoir management services to the oil and gas industry. Wall Street analysts, on average, expect Core Laboratories to report revenue of $246.66 million on earnings of $1.11 per share.

The current short interest as a percentage of the float for Core Laboratories sits at 6.1%. That means that out of the 46.43 million shares in the tradable float, 2.84 million shares are sold short by the bears. The bears have also been increasing their bets from the last reporting period by 8.3%, or by about 216,000 shares. If the bears are caught pressing too hard here, then we could easily see a sizeable short-squeeze develop post-earnings.

From a technical perspective, CLB is currently trading below both its 50-day and 200-day moving averages, which is bearish. This stock gapped down big earlier this month from around $120 to $100 with massive volume. Following that gap, shares of CLB went on to hit a low of $98.66 a share. This stock has subsequently started to bounce a bit to its current price of $102.50 a share. That move has pushed CLB within range of triggering a breakout post-earnings back above its gap down day high of $105.08 a share.

If you’re in the bull camp on CLB, then I would wait until after its earnings report and look for long-biased trades if this stock manages to break out above its gap down day high of $105.08 a share with high volume. Look for volume on that move that registers near or above its three-month average action of 433,329 shares. If we get that move, then CLB will setup to re-fill some of that gap and possible trade back towards its 50-day moving average of $118.35 a share.

I would simply avoid CLB 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 $100 to 98.66 a share with high volume. If we get that move, then CLB will setup to re-test or possibly take out its next major support levels at $93.30 to $82.74 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.