Stock Quotes in this Article: HGG, MNRO, SKS, SPLS, TIVO

MADISON, Wis. (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.

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Hhgregg

My first earnings short-squeeze trade idea is specialty electronics retailer Hhgregg (HGG), which is set to release numbers on Monday after the market close. Wall Street analysts, on average, expect Hhgregg to report revenue of $622.57 million on earnings of 30 cents per share.

During the last quarter, this company posted revenue of $799.6 million, and GAAP reported sales were 3.6% lower than the prior-year quarter's $829.5 million. Also during the last quarter, non-GAAP EPS was 52 cents per share, and GAAP EPS was 51 cents per share, which was 15% lower than the prior-year quarter's 60 cents per share.

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The current short interest as a percentage of the float for Hhgregg is extremely high at 37.6%. That means that out of the 15.97 million shares in the tradable float, 5.04 million shares are sold short by the bears. This is a high short interest on a stock with a very low tradable float. Any bullish earnings news could easily spark a sharp short-covering rally for HGG post-earnings.

From a technical perspective, HGG is currently trending above both its 50-day and 200-day moving averages, which is bullish. This stock has been uptrending strong for the last five months, with shares soaring higher from its low of $6.73 to its 52-week high at $15.87 a share. During that uptrend, shares of HGG have been consistently making higher lows and higher highs, which is bullish technical price action. That move has now pushed shares of HGG within range of triggering a major breakout trade post-earnings.

If you're bullish on HGG, then I would wait until after its report and look for long-biased trades if this stock manages to break out above some key overhead resistance levels at $16 to $16.65 a share with high volume. Look for volume on that move that hits near or above its three-month average action of 267,779 shares. If that breakout hits, then HGG will set up to re-test or possibly take out its next major overhead resistance levels at $22 to $24 a share.

I would simply avoid HGG or look for short-biased trades if after earnings it fails to trigger that breakout and then drops back below some key near-term support levels at $15 to $14 a share with high volume. If we get that move, then HGG will set up to re-test or possibly take out its next major support levels at $13.36 to its 50-day moving average at $12.86 a share.

Saks

Another potential earnings short-squeeze play is department store retailer Saks (SKS), which is set to release its numbers on Tuesday before the market open. Wall Street analysts, on average, expect Saks to report revenue of $778.53 million on earnings of 19 cents per share.

This company has topped Wall Street estimates in three of the last four quarters. With this stock trending strong, up 14% on the year, we could easily see another solid report from Saks that sends the stock higher post-earnings.

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The current short interest as a percentage of the float for Saks is extremely high at 25.5%. That means that out of the 95.26 million shares in the tradable float, 23.75 million shares are sold short by the bears. The bears have also been increasing their bets from the last reporting period by 2.2%, or by about 501,000 shares. If the bears are caught pressing their bets into a strong quarter, then shares of SKS could easily rip higher post-earnings.

From a technical perspective, SKS is currently trending above both its 50-day and 200-day moving averages, which is bullish. This stock has been uptrending strong for the last month and change, with shares moving higher from its low of $10.77 to its recent high of $12.15 a share. During that uptrend, shares of SKS have been consistently making higher lows and higher highs, which is bullish technical price action. That move has now pushed shares of SKS within range of triggering a near-term breakout trade post-earnings.

If you're in the bull camp on SKS, then I would wait until after its report and look for long-biased trades if this stock manages to break out above its 52-week high at $12.16 a share and then once it clears its three-year high at $12.97 a share with high volume. Look for volume on that move that registers near or above its three-month average volume of 2.01 million shares. If that breakout triggers, then SKS will set up to trend well north of $13 a share. Some possible upside targets off that breakout are $15 to $17 a share.

I would simply avoid SKS or look for short-biased trades if after earnings it fails to trigger that breakout and then drops back below its 50-day at $11.60 a share with high volume. If we get that move, then SKS will set up to re-test or possibly take out its 200-day at $11.01 a share. Any high-volume move below its 200-day would then put $10.50 to $10 into range for shares of SKS.

Staples

One potential earnings short-squeeze candidate is office products player Staples (SPLS), which is set to release numbers on Wednesday before the market open. Wall Street analysts, on average, expect Staples to report revenue of $5.91 billion on earnings of 27 cents per share.

The current short interest as a percentage of the float for Staples is rather high at 10.3%. That means that out of the 662.40 million shares in the tradable float, 67.96 million shares are sold short by the bears. If the bulls get the earnings news they're looking for, then shares of SPLS could easily spike significantly higher post-earnings.

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From a technical perspective, SPLS is currently trending above both its 50-day and 200-day moving averages, which is bullish. This stock has been uptrending strong for the last month and change, with shares pushing higher from its low of $12.25 to its intraday high of $14.75 a share. During that uptrend, shares of SPLS have been consistently making higher lows and higher highs, which is bullish technical price action. That move has now pushed shares of SPLS within range of triggering a major breakout trade.

If you're bullish on SPLS, then I would wait until after its report and look for long-biased trades if this stock manages to break out above some near-term overhead resistance at $15.05 a share and then once it takes out its 52-week high at $15.19 a share with high volume. Look for volume on that move that hits near or above its three-month average action of 11.56 shares. If we get that breakout, then SPLS will set up to re-test or possibly take out its next major overhead resistance level at $16.44. Any high-volume move above $16.44 will then give SPLS a chance to re-fill some of its previous gap down zone from 2011 that started near $19 a share.

I would avoid SPLS or look for short-biased trades if after earnings it fails to trigger that breakout, and then drops back below some key near-term support at $14 a share with high volume. If we get that move, then SPLS will set up to re-test or possibly take out its 50-day moving average at $13.41 a share. Any high-volume move below $13.41 will then put its 200-day at $12.23 into range for shares of SPLS.

TiVo

Another earnings short-squeeze prospect is digital video recorder set-top box maker TiVo (TIVO), which is set to release numbers on Monday after the market close. Wall Street analysts, on average, expect TiVo to report revenue of $61.88 million on a loss of 14 cents per share.

The current short interest as a percentage of the float for Tivo is notable at 8.2%. That means that out of the 115.53 million shares in the tradable float, 9.97 million shares are sold short by the bears. The bears have also been increasing their bets from the last reporting period by 5.3%, or by about 501,000 shares. If the bears are caught leaning too strong into a bullish quarter, then shares of TIVO could jump significantly higher post-earnings.

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From a technical perspective, TIVO is currently trending above both its 50-day and 200-day moving averages, which is bullish. This stock has been uptrending strong the last month and change, with shares moving higher from its low of $10.71 to its intraday high of $12.98 a share. During that uptrend, shares of TIVO have been consistently making higher lows and higher highs, which is bullish technical price action. That move has now pushed shares of TIVO within range of triggering a major breakout trade.

If you're bullish on TIVO, then I would wait until after its report and look for long-biased trades if this stock manages to break out above some near-term overhead resistance levels at $13 to its 52-week high at $13.49 a share with high volume. Look for volume on that move that hits near or above its three-month average action of 1.93 million shares. If that breakout triggers, then TIVO will set up to enter new 52-week high territory, which is bullish technical price action. Some possible upside targets off that move are $16 to $18 a share.

I would avoid TIVO or look for short-biased trades if after earnings it fails to trigger that breakout, and then drops back below some key near-term support levels at $12.25 to its 50-day at $11.96 a share with high volume. If we get that move, then TIVO will set up to re-test or possibly take out its next major support levels at its 200-day of $11.25 to $10.70 a share.

Monro Muffler Brake

My final earnings short-squeeze play today is automotive undercar repair and tire services player Monro Muffler Brake (MNRO), which is set to release numbers on Tuesday before the market open. Wall Street analysts, on average, expect Monro Muffler Brake to report revenue of $189.92 million on earnings of 25 cents per share.

The current short interest as a percentage of the float for Monro Muffler Brake is extremely high at 22.9%. That means that out of the 29.28 million shares in the tradable float, 6.77 million shares are sold short by the bears. The bears have also been increasing their bets from the last reporting period by 2.3%, or by about 148,000 shares. If the bears are caught pressing their bets into a bullish quarter, then shares of MNRO could easily explode higher post-earnings.

From a technical perspective, MNRO is currently trending 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 soaring higher from its low of $37.88 to its recent high of $46.33 a share. During that uptrend, shares of MNRO have been consistently making higher lows and higher highs, which is bullish technical price action. That move has now pushed shares of MNRO within range of triggering a near-term breakout trade post-earnings.

If you're in the bull camp on MNRO, then I would wait until after its report and look for long-biased trades if this stock manages to break out above some near-term overhead resistance at $45 and then once it clears its 52-week high at $46.33 and its three-year high at $46.96 a share with high volume. Look for volume on that move that hits near or above its three-month average volume of 307,490 shares. If that breakout triggers, then MNRO could easily trend well north of $50 a share.

I would simply avoid MNRO or look for short-biased trades if after earnings it fails to trigger that breakout, and then drops back below some key near-term support at $43.74 a share with high volume. If we get that move, then MNRO will set up to re-test or possibly take out its next major support level at its 50-day moving average of $40.73 a share. Any high-volume move below $40.73 a share will then put $39 to $38 into range for shares of MNRO.

To see more potential earnings short squeeze plays, check out the Earnings Short Squeeze Plays portfolio on Stockpickr.

 

 

-- Written by Roberto Pedone in Madison, Wis.

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At the time of publication, author had no positions in stocks mentioned.

Roberto Pedone, based out of Madison, Wis., is an independent trader who focuses on technical analysis for small- and large-cap stocks, options, futures, commodities and currencies. Roberto studied international business at the Milwaukee School of Engineering, and he spent a year overseas studying business in Lubeck, Germany. His work has appeared on financial outlets including CNBC.com and Forbes.com. You can follow Pedone on Twitter at www.twitter.com/zerosum24 or @zerosum24.