Stock Quotes in this Article: EZPW, MCZ, PANL, ROVI, SGI

WINDERMERE, Fla. (Stockpickr) -- With earnings season under way on Wall Street, it’s time for market-players to create a powerful watch list of stocks due to report numbers that are also heavily shorted by the bears.

Short-sellers hate being caught short a stock that produces earnings that please the bulls. 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.

 

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    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.

    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 the stock is acting very bullish technically and you have a very strong conviction that it is going to rip higher.

    Here’s a look at a number of stocks that could experience big short squeezes when they report earnings this week.

     

    Universal Display

    My first earnings short-squeeze idea today is organic light-emitting diode technology developer Universal Display (PANL), which is set to report its numbers on Tuesday after the market close. Wall Street analysts, on average, expect Universal Display to report revenue of $12.41 million on a loss of 1 cent per share.

    This stock is trading down sharply today by over 10% to $46.55 as we quickly approach its earnings report. This near-term volatility only raises the chances of a big earnings move; the stock also soared on Friday from under $45 a share to close to $53.

    The current short interest as a percentage of the float for Universal Display is rather large at 16.2%. That means that out of the 31.52 million shares in the tradable float, 6.39 million are sold short by the bears.

    From a technical standpoint, this stock is currently trading above its 200-day moving average and below its 50-day moving average, which is neutral trendwise. This stock recently hit a high of $60.28 in September and has since then sold off and started to trade sideways between $52.50 and around $41. A move outside of the sideways trading pattern will setup this stock for its next big trend.

    If you’re bullish on this stock, I would look to get long after it report its results if it breaks out above $53 a share on heavy volume. Look for volume that’s tracking in close to or above its three-month average action of 2.3 million shares. If we get the breakout post-earnings, then look for this stock to challenge its September high of $60.28, or possibly go much higher.

    I would get short Universal Display after earnings only if it drops below its 200-day moving average of $43.21 on heavy volume. I would get aggressively short if it takes out some previous support zones at $40.93 to $40.68 a share on strong volume. This stock could plunge big if those support zones are taken out, so be ready to play this short if we get that action.

    Scott Rothbort previously highlighted Universal Display in "7 Top Stocks That Should Continue to Outperform."

    Rovi

    Another potential earnings short-squeeze play is Rovi (ROVI), which is set to report results on Tuesday after the market close. Rovi focuses on powering the discovery and enjoyment of digital entertainment providing companies a broad set of integrated solutions. Wall Street analysts, on average, expect Rovi to report revenues of $197.94 million on earnings of 61 cents per share.

    This company missed estimates last quarter after beating estimates in the previous quarter. In the second quarter, Rovi reported a profit of 41 cents per share versus estimates of 49 cents. Two quarters ago, they beat analysts’ expectations by 9 cents with a net income of 50 cents. Revenue has trended higher for the past three quarters. Their loss in the last quarter came after three straight quarters of a profit.

    The current short interest as a percentage of the float for Rovi stands at 8.3%. That means that out of the 109.60 million shares in the tradable float, 9.19 million are sold short by the bears. It’s worth mentioning that the bears have been increasing their bets from the last reporting period by 6.3%, or by about 541,300 shares.

    >>5 Beaten-Down Tech Stocks Poised to Rebound

    From a technical standpoint, this stock is currently below its 200-day moving average and right at its 50-day moving average, which is neutral trendwise. This stock plunged from its July high of $59.31 to a recent low of $38.79 a share. Since hitting that low, the stock has rebounded to its current level of just over $46.

    If you’re bullish on this name, I would wait until after they report and buy the stock once it trades above $48.78 and then $52.45 (its 200-day moving average) on heavy volume. Look for volume that’s tracking in close to or above its three-month average action of 1.34 million shares. If those levels are taken out, I would target a run back toward $58 to $59 a share.

    I would get short this stock after it reports earnings only if it fails to get back above its 50-day moving average of $46.51 a share. If this stock fails to get back above the 50-day post-earnings, then I would short off any weakness and target a drop back toward that 52-week low of $38.79.

    Silicon Graphics International

    One earnings short-squeeze idea in the computer systems complex is high-end computer servers and storage systems developer Silicon Graphics International (SGI), which is set to release numbers on Tuesday after the market close. Wall Street analysts, on average, expect Silicon Graphics to report revenue of $163.79 million on earnings of 4 cents per share.

    This is a heavily shorted stock that’s trending strong heading into the quarter, since shares have been making higher highs and higher lows since hitting a low of $10.45 in October. This stock now sets up to break out after earnings if the company can deliver solid earnings and bullish guidance.
    tThe current short interest as a percentage of the float for Silicon Graphics is an extremely large 24.3%. That means that out of the 28.66 million shares in the tradable float, 7.48 million are sold short by the bears. The short-sellers have also been increasing their bets from the last reporting period by 4.1%, or by about 292,200 shares. The bears could be pressing into the quarter, so look for any strength after the report to long this name.

    From a technical standpoint, this equity is currently trading above its 50-day moving average and below its 200-day moving average, which is neutral trendwise. During the past six months, this stock has been finding buying support at $11 to $10.50 a share and selling pressure anywhere above $16 a share.

    The way I would play this stock is to wait until after its report and buy if it trades back above its 200-day moving average of $15.75 on strong volume. Look for volume that’s tracking in close to or above its three-month average action of 654,700 shares. If that level is taken out, I would then add to any long position once the stock moves above $17 to $17.71 a share on strong volume. Target a run back towards $19 to $23 if the bulls push this higher post-earnings.

    I would only get short this stock after they report earnings if it drops below its 50-day moving average of $13.85 a share on heavy volume. I would add then add to any short position if $11.90 is taken out with volume. I would target a drop back towards $10.50 a share or possibly even lower if the bears whack this lower post-earnings.

    Silicon Graphics shows up on a list of 7 Tech Stocks With Limited Downside.

    Mad Catz Interactive

    One earnings short-squeeze play in computer peripherals complex video game accessories maker Mad Catz Interactive (MCZ), which is set to release numbers on Wednesday after the market close. There are currently no analysts’ estimates available for Mad Catz.

    This stock is setting up for a big breakout if the company can manage to report a better quarter than its first quarter's weaker-than-expected earnings due to slowing demand. Revenue for the first-quarter dropped 17.3% to $16.5 million from $19.9 million a year ago. Sales dropped off due to weak demand from Europe and the termination of a third-part distribution agreement.

    The current short interest as a percentage of the float for Mad Catz is notable at 3.8%. That means that out of the 61.52 million shares in the tradable float, 2.33 million are sold short by the bears. This isn’t a huge short interest, but it’s more than enough to spark a solid short-squeeze off any bullish results.

    >>5 Stocks Under $10 Setting Up to Soar

    From a technical standpoint, this stock is currently trading above its 50-day moving average and below its 200-day moving average, which is neutral trendwise. This stock plunged from its July high of $1.63 a share to a recent low of 55 cents to 54 cents a share. After hitting that low, the stock formed a double bottom at 55 cents to 54 cents and now sets up to breakout off any bullish earnings.

    The way I would play this name would be to wait until after its report and buy the stock if it breaks out above 90 cents to $1.04 a share on heavy volume. Look for volume that’s tracking in close to or above its three-month average action of 652,900 shares. If those levels are taken out, I would then add to any long position once $1.10 to $1.11 are breached with volume. Target a run back towards the 200-day moving average of $1.33 if the bulls gain full control if this stock post-earnings.

    Ezcorp

    One more earnings short-squeeze candidate is pawn shop operator Ezcorp (EZPW), one of TheStreet Ratings' top-rated consumer finance stocks, which is set to release numbers on Tuesday after the market close. Wall Street analysts, on average, expect Ezcorp to report revenue of $226.47 million on earnings of 70 cents per share.

    This pawn shop player matched Wall Street estimates last quarter, but traders will be looking for a beat this time around since their positioned in the right spot for a weak economy. Ezcorp’s profits have trended up year-over-year by an average of 26.6% over the past five quarters. A solid beat and bump up in guidance should set this stock off on a solid short-squeeze.

    The current short interest as a percentage of the float for Ezcorp stands at 6.1%. That means that out of the 43.54 million shares in the tradable float, 2.68 million are sold short by the bears.

    >>5 Black Friday Short-Squeeze Stocks

    From a technical standpoint, this stock is currently trading below both its 50-day and 200-day moving averages, which is bearish. The stock formed a triple top back in July around $38.50 to $38 a share, and subsequently plunged to a recent low of $25.30. Since hitting that low, the stock has rebounded to its current price of around $28 a share.

    If you’re bullish on this stock, I would wait until after its report and look to get long once the stock breaks out above $28 to $31 share on heavy volume. Look for volume that’s tracking in close to or above its three-month average action of 580,200 shares. A high-volume move above those levels should set up EZPW to re-test its next significant resistance level at around $34 a share.

    I would get short this stock after earnings only if it trades below $26 to $25.30 a share on heavy volume. A drop below those levels should set this stock up for a move lower towards $20 if the bears hammer this name post-earnings.
    To see more potential earnings short squeeze plays, including Caribou Coffee (CBOU), Abraxas Petroleum (AXAS) and SodaStream International (SODA), 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.