Stock Quotes in this Article: CBRL, CHS, CTRN, DAKT, HR

 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 will be in such high demand that by waiting you risk missing a lot of the move. That’s why it can be worth betting prior to the report -- but only if you have a very strong conviction that the stock is going to rip higher, and its acting extremely bullish technically.

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

     

    Daktronics

    My first earnings short-squeeze idea is Daktronics (DAKT), which is set to report its numbers on Tuesday before the market open. This is a supplier of electronic scoreboards, large electronic display systems, and related marketing services, digital messaging solutions, software, and services for sporting, commercial, and transportation applications. Wall Street analysts, on average, expect Daktronics to report revenue of $128.72 million on earnings of 13 cents per share.

    This company missed Wall Street estimates last quarter, so investors will be looking for a much better showing for this quarter. The current short interest as a percentage of the float for Daktronics is 3.4%. That means that out of the 36.42 million shares in the tradable float, 1.22 million shares are sold short by the bears. This isn’t a huge short interest, but it’s more than enough to spark a short-squeeze off a bullish earnings report.

    From a technical standpoint, this stock is currently trading below both its 50-day and 200-day moving averages, which is bearish. This stock was hammered down from its July high of $11.37 to a recent low of $8.04. After hitting that low, the stock formed a double bottom when it re-tested $8.01 in October and then rallied to a high of $10.73, before setting in at its current price of $9.50.

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    If you’re bullish on this stock, I would look to get long after it report its results if the stock trades back above its 200-day moving averageat $10.26 on high volume. Look for volume that’s tracking in close to or above its three-month average of 141,042 shares. If we see that move post-earnings, I would then add to any long position once the stock takes out some near-term overhead resistance at $10.73. Target a run back toward $11.37 or possibly higher if the bulls gain full control of this stock.

    I would get short or avoid any long trade on DAKT after it releases its results if the stock drops below some near-term support zones at $9.20 to $9 a share on heavy volume. A drop below those levels will setup a re-test of $8 a share. I would add to any short positions if the stock takes out $8 a share with heavy volume.

    Citi Trends

    A potential earnings short-squeeze trade is retailer of urban fashion apparel and accessories Citi Trends (CTRN), which is set to report results on Tuesday before the market open. Wall Street analysts, on average, expect Citi Trends to report revenue of $143.49 million on a loss of 37 cents per share. This beaten-down stock was trading over $16 a share in July, and it is now changing hands at around $10.40.

    The current short interest as a percentage of the float for Citi Trends is notable at 7.8%. That means that out of the 13.31 million shares in the tradable float, 1.13 million shares are sold short by the bears. This stock has an extremely small float and a decent short interest. Any bullish earnings news could easily set this off to the upside since the stock is so beaten-down.

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    From a technical standpoint, this stock is currently trading well below its 200-day moving average and below its 50-day moving average, which is bearish. This stock recently sold off from $13.37 to its current price of just over $10.40 a share. The stock has some major previous support that sits right around $9.65 a share. The near-term resistance on CTRN is at $11 a share.

    If you’re bullish on this stock, I would wait until after it report its results and buy the stock once it clears $11 on high volume. Look for volume that’s tracking in close to or above its three-month average action of 100,092 shares. I would then add to any long positions once the stock takes out its 200-day moving average of $11.79 with strong volume. Target a run back toward $12.50 or possibly higher if the bulls push this name up post-earnings.

    I would avoid any long trades or would get short this stock after earnings if shares drop below that major support zone at $9.65 on heavy volume. I would target a drop back towards its next significant support level at $7 a share if the bears smack this lower post-earnings.

    Chico’s FAS

    Another earnings short-squeeze play in the retail apparel complex is national specialty retailer Chico’s FAS (CHS), which is set to release numbers on Tuesday before the market open. Wall Street analysts, on average, expect Chico’s FAS to report revenue of $548.89 million on earnings of 20 cents per share.

    This company beat Wall Street estimates last quarter by 1 cent, so market players will be looking for another beat for this quarter. Chico’s FAS’ profits have trended higher year-over-year by an average of 29.3% over the last five quarters. Revenue has also trended higher for three consecutive quarters.

    The current short interest as a percentage of the float for Chico’s FAS sits at 5.8%. That means that out of the 168.94 million shares in the tradable float, 9.88 million are sold short by the bears. The short-sellers have also been increasing their bets from the last reporting period by 19.6%, or by about 1.61 million shares.

    >>Stocks Rising on Unusual Volume

    From a technical standpoint, this stock is currently trading below its 50-day and 200-day moving averages, which is bearish. This stock was hammered by the sellers from its July high of $16.44 to a recent low of $10.52. That sharp selloff could setup a nice earnings-related pop in the stock if the sellers are done dumping shares. That pop started on Monday with the stock finishing up 2.3% on heavy volume to $11.61.

    The way I would play this name would be to wait until after it reports its earnings and buy the stock if it trades back above its 50-day at $12.27 on high volume. Look for volume that’s tracking in close to or above its three-month average action of 2,949,980 shares. I would then add to any long position once the stock moves above some overhead resistance at $13.15 and the 200-day at $13.67 on heavy volume. Target a run back towards $14 to $15 a share if the bulls can set off a short-squeeze.

    I would consider shorting this stock after earnings only if it drops below some major near-term support at $10.50 a share on high-volume. If $10.50 is taken out post-earnings, then I would look for this stock to re-test the next significant support level at $8.10 a share.

    Cracker Barrel Old Country Store

    One earnings short-squeeze play in restaurants complex is casual dining player Cracker Barrel Old Country Stores (CBRL), which is set to release numbers on Tuesday before the market open. Wall Street analysts, on average, expect Cracker Barrel Old Country Store to report revenue of $602.20 million on earnings of $1.05 per share.

    This company crushed Wall Street estimates last quarter after they beat by 9 cents per share. Market players will be looking for another sizeable beat this quarter that could lead to big spike higher in the stock. Cracker Barrel’s profits have jumped year-over-year by an average of 3.5% over the past five quarters. Revenue has also trended up for three consecutive quarters.

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    The current short interest as a percentage of the float for Cracker Barrel, one of the highest-yielding leisure stocks, is 7.2%. That means that out of the 19.38 million shares in the tradable float, 1.61 million are sold short by the bears. This is a pretty decent short interest on a stock with a very low float. Any bullish earnings news and guidance could easily spark a solid short-squeeze.

    From a technical standpoint, this stock is currently trading above its 50-day and 200-day moving averages, which is bullish. On Monday, while the market sold off hard, shares of CBRL jumped 1% as the stock moved back above its 200-day moving average of $45.66 on heavy volume.

    If you’re bullish on Cracker Barrel, wait until after its report and buy the stock if it breaks out above some past overhead resistance at $46.66 on high-volume. Look for volume that’s tracking in close to or above its three-month average action of 369,030 shares. If we see that high-volume breakout post-earnings, then I expect this stock to re-test its July high near $49.60 a share, or possibly go much higher.

    I would look to short this stock after earnings only if it fails to breakout and falls back below its 200-day at $45.66 on heavy volume. I would add to any short positions if the stock then moves back below its 50-day at $42 on strong volume. Target a fall back towards $41 to $39, or possibly even lower if market players are dumping this stock post-earnings.

    Hormel Foods

    My final earnings short-squeeze candidate is food processing player Hormel Foods (HRL), which is set to release numbers on Tuesday before the open. Wall Street analysts, on average, expect Hormel Foods to report revenue of $2.11 billion on earnings of 42 cents per share.

    This stock sets up for a perfect breakout or breakdown trade as we head into their earnings report. What I mean by that, is Hormel is trading very close to some key breakout levels that sit just above it, and its trading right near both its 50-day and 200-day moving averages. A move outside of either range will set this stock up for a post-earnings spike.

    The current short interest as a percentage of the float for Hormel Foods is 5.9%. That means that out of the 135.74 million shares in the tradable float, 7.97 million shares are sold short by the bears. This isn’t a huge short interest, but it’s more than enough to spark a decent short interest if the company can deliver what the bulls are looking for.

    From a technical standpoint, this stock is currently trading above both its 50-day and 200-day moving averages, which is bullish. That said, this stock recently ran into some overhead resistance at $30.06 to $30.01 a share, and sold off to its current price of just under $29.

    If you’re bullish on Hormel, I would wait until after it reports earnings and buy the stock if it breaks out above $30.06 to $30.37 on big volume. Look for volume that’s tracking in close to or above its three-month average action of around 1.1 million shares. Volume on Monday was 1.4 million as the stock dropped 1.4% ahead of the quarter. I would target a spike of 10% or higher if HRL breaks out post-earnings since it will mean this stock has entered all-time high territory. Momentum traders will be all over this name if we get the breakout.

    I would only get short this stock after earnings are reported if it trades back below both its 50-day of $28.45 and 200-day of $28.17 on high volume. I would target a drop back towards the next significant support zones near $26.50 to $25 a share, or possibly even lower if the short-sellers take over this stock post-earnings.

    To see more potential earnings short squeeze plays, including Collective Brands (PSS), CNinsure (CISG) and Jack in the Box (JACK), 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.