Stock Quotes in this Article: BWLD, CROX, NFLX, REGN, USNA

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.

Buffalo Wild Wings

My first earnings short-squeeze trade idea is Buffalo Wild Wings (BWLD), an owner, operator and franchiser of restaurants. which is set to release numbers on Tuesday after the market close. Wall Street analysts, on average, expect Buffalo Wild Wings to report revenue of $254.03 million on earnings of 60 cents per share.

This company missed Wall Street estimates last quarter after beating estimates in the prior two quarters. During the second quarter, this company reported a profit of 62 cents per share versus estimates of 68 cents per share. In the first quarter, the company beat Wall Street estimates by 3 cents per share. Buffalo Wild Wings has averaged year-over-year revenue growth of 33.2% over the last four quarters.

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The current short interest as a percentage of the float for Buffalo Wild Wings is very high at 14.1%. That means that out of the 18.34 million shares in the tradable float, 2.59 million shares are sold short by the bears. This is a high short interest on a stock with a very low float. Any bullish earnings news could easily spark a sizeable short-squeeze post-earnings.

From a technical perspective, BWLD 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 $68.71 to a recent high of $89.90 a share. During that uptrend, shares of BWLD have been consistently making higher lows and higher highs, which is bullish technical price action. That move has now pushed BWLD within range of triggering a near-term breakout trade post-earnings.

If you’re bullish on BWLD, then I would wait until after its report and look for long-biased trades as long as it’s trending above its 200-day at $81.74 a share, and then once it breaks out above some near-term overhead resistance at $88 to $89.90 a share with high volume. Look for volume on that move that registers near or above its three-month average volume of 588,131 shares. If that breakout triggers, then look BWLD to re-test or possibly take out its next major overhead resistance level at $94.81 a share.

I would simply avoid BWLD or look for short-biased trades if after earnings it fails to trigger that breakout, and then drops below its 200-day moving average of $81.74 a share with heavy volume. If we get that move, then BWLD will setup to re-test or possibly take out its next major support levels at $76 to $72 a share.

Netflix

Another potential earnings short-squeeze play is Netflix (NFLX), an Internet subscription service streaming television shows and movies, which is set to release its numbers on Tuesday after the market close. Wall Street analysts, on average, expect Netflix to report revenue of $904.89 million on earnings of 4 cents per share.

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This company has beaten Wall Street estimates the last four quarters and is coming off a quarter where it beat estimates by 7 cents per share, after reporting a profit of 11 cents per share against a mean estimate of 4 cents per share. This company has averaged year-over-year revenue growth of 32.3% over the last four quarters.

The current short interest as a percentage of the float for Netflix is extremely high at 28.9%. That means that out of the 54.20 million shares in the tradable float, 15.57 million shares are sold short by the bears. This stock has a very high short interest and a relatively low float. Any bullish earnings news could easily setup NFLX for a monster short squeeze post-earnings.

From a technical perspective, NFLX is currently trading above its 50-day moving average and below its 200-day moving average, which is neutral trendwise. This stock recently soared back above its 50-day moving average with heavy volume and triggered a near-term breakout trade above $60 to $61.50 a share, and above $66.65 a share. That move is now pushing NFLX within range of triggering another major near-term breakout trade.

If you’re in the bull camp on NFLX, 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 $69.84 to $74.23 a share with high volume. Look for volume on that move that hits near or above its three-month average volume of 5.2 million shares. If NFLX triggers that move, then look for this stock to rip higher and re-test or possibly take out its next major overhead resistance levels at $77 to $83.10 a share, or possibly even $86.65 a share.

I would simply avoid NFLX 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 $61.23 a share with high volume. If we get that move, then NFLX will setup to re-test or possibly take out its next major support level at $53.05 to $52.81 a share.

For another take on Netflix, check out “5 Big Stocks to Trade for Gains.”

Regeneron Pharmaceuticals

A potential earnings short-squeeze play in the biotechnology and drugs complex is Regeneron Pharmaceuticals (REGN), which is set to release numbers on Wednesday before the market open. This fully integrated biopharmaceutical company discovers, invents, develops, manufactures and commercializes medicines for the treatment of serious medical conditions. Wall Street analysts, on average, expect Regeneron to report revenue of $349.43 million on earnings of 96 cents per share.

Just recently, Bank of America/Merrill Lynch said it expects Regeneron’s Eylea sales growth to increase. The firm issued a buy rating on the stock and a $190 price target. Lazard Capital also recently said that companies most likely to beat third quarter top-line consensus expectations are Questcor (QCOR), Regeneron, Alexion (ALXN) and Gilead (GILD).

The current short interest as a percentage of the float for Regeneron Pharmaceuticals sits at 6.7%. That means that out of the 89.25 million shares in the tradable float, 4.99 million shares are sold short by the bears.

From a technical perspective, REGN 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 four months, with shares soaring from a low of $107.31 to its recent high of $166.39 a share. During that uptrend, shares of REGN have been consistently making higher lows and higher highs, which is bullish technical price action. That move has now pushed REGN within range of triggering a near-term breakout trade post-earnings.

If you’re bullish on REGN, 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 $166.39 a share with high volume. Look for volume on that move that tracks in at near or above its three-month average volume of 719,498 shares. If REGN triggers that breakout, then this stock will enter new 52-week-high territory, which is bullish technical price action. Some possible upside targets are $175 to north of $180 a share.

I would avoid REGN 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 $148.77 a share with high volume. If we get that action, then REGN will setup to re-test or possibly take out its next major support levels at $142.13 to $141.84 a share.

Regeneron shows up on a list of 10 Companies That Prove Stock Picking Is Still Alive.

Usana Health Sciences

Another earnings short-squeeze trade candidate is Usana Health Sciences (USNA), which is set to release numbers on Wednesday before the market open. This company develops and manufactures high-quality, science-based nutritional and personal care products with a focus on promoting long-term health and reducing the risk of chronic degenerative disease. Wall Street analysts, on average, expect Usana to report revenue of $161.63 million on earnings of $1.06 per share.

This stock has been trending very strong so far in 2012, with shares up a whopping 49%%. Shares of USNA are now trading just about five points off its 52-week high of $49.51 a share ahead of its report.

The current short interest as a percentage of the float for Usana is extremely high at 46.5%. That means that out of the 6.40 million shares in the tradable float, 3.06 million shares are sold short by the bears. The bears have also been increasing their bets from the last reporting period by 8.2%, or by about 232,000 shares. If the bears are caught pressing their bets into the quarter, then this stock could explode to the upside post-earnings.

From a technical perspective, USNA is currently trading above its 200-day moving average and just below its 50-day moving average, which is neutral trendwise. This stock has been uptrending strong for the past six months, with shares soaring from a low of $36.02 to a recent high of $49.51 a share. During that uptrend, shares of USNA have been consistently making higher lows and higher highs, which is bullish technical price action. That said, shares of USNA recently ran into some tough resistance at around $49 and it has now slid back below its 50-day.

If you’re bullish on USNA, then I would wait until after its report and look for long-biased trades if this stock can manage to recapture its 50-day at $46.45 a share, and then break out above some near-term overhead resistance levels at $49.10 to $49.51 a share with high volume. Look for volume on that move that hits near or above its three-month average action of 150,778 shares. If USNA triggers that breakout, then this stock will enter new 52-week-high territory, which is bullish technical price action. Some possible upside targets are $60 to $70 a share post-earnings.

I would avoid USNA 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 $44.19 to $42.26 a share with heavy volume. If we get that action, then USNA will setup to re-test or possibly take out its 200-day moving average of $40.44 a share post-earnings.

Crocs

My final earnings short-squeeze play today is footwear and accessories designer Crocs (CROX), which is set to release numbers on Wednesday after the market close. Wall Street analysts, on average, expect Crocs to report revenue of $302.37 million on earnings of 43 cents per share.

This company has beaten Wall Street estimates the last four quarters and it is coming off a quarter where it smashed estimates by 5 cents per share, after reporting net income of 68 cents per share against a mean estimate of 63 cents per share. This company has averaged year-over-year revenue growth of 18.3% over the last four quarters. Crocs has also reported three consecutive quarters of income increases.

The current short interest as a percentage of the float for Crocs is notable at 6.1%. That means that out of the 89.19 million shares in the tradable float, 5.44 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 the bulls get the news they’re looking for.

From a technical perspective, CROX is currently trading below both its 50-day and 200-day moving averages, which is bearish. This stock ran into some tough resistance in September at around $18.60 a share, and since then it has downtrended to a low of $15.60 a share. During that downtrend, shares of CROX have been mostly making lower highs and lower lows, which is bearish technical price action. That said, the stock has stabilized around $15.60 and is now moving within range of triggering a near-term breakout trade.

If you’re in the bull camp on CROX, 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 $16.92 to $18.60 a share with high volume. Look for volume on that move that registers near or above its three-month average action of 1.7 million shares. If we get that move, then CROX will setup to re-test or possibly take out its next major overhead resistance levels at $20 to $22.59 a share post-earnings.

I would simply avoid CROX or look for short-biased trades if after earnings it fails to trigger that breakout, and then moves back below some near-term support at $15.60 a share with high volume. If we get that move, then CROX will setup to re-test or possibly take out its next major support levels at $13.84 to $13.80 a share post-earnings. Any move below $13.80 will push CROX into new 52-week low territory, which is bearish technical price action.

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.