Stock Quotes in this Article: ABM, AIR, PAY, PIR, STEI

WINDERMERE, Fla. (Stockpickr) -- 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.

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.

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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. 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 technically very bullish.

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

     

    VeriFone Systems

    My first earnings short-squeeze idea is secure electronic payment solutions player VeriFone Systems (PAY), which is set to release its numbers on Wednesday after the close. Wall Street analysts, on average, expect VeriFone Systems to report revenue of $406.45 million on earnings of 51 cents per share.

    This company matched Wall Street estimates last quarter after beating forecast in the previous two quarters. VeriFone Systems has registered double-digit year-over-year percentage revenue growth for the past four quarters. Over that timeframe, the company has averaged growth of 24.1%, with the biggest growth seen in the first quarter when revenue soared 27% from the same quarter last year. Their net income has also trended higher for the three straight quarters.

     

    The current short interest as a percentage of the float for VeriFone Systems is 4.7%. That means that out of the 103.52 million shares in the tradable float, 4.90 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-squeeze if VeriFone Systems can report a solid quarter and raise its forward guidance.

    From a technical standpoint, PAY is currently trading below its 200-day moving average and above its 50-day moving average, which is neutral tendwise. This stock formed a double bottom in August and October between $30.25 and $31.19 a share. Since that bottom, the stock has rallied strong to its current price of $42.27.

    If you’re bullish on PAY, I would get long after it reports earnings if the stock breaks out above its 200-day of $43.45 and $45.56 on high-volume. Look for volume that’s tracking in close to or above its three-month action of about 2.2 million shares. If we get that action, I would then add to any long positions above $46.58 and target a run back toward $49 a share.

    I would get short or avoid any long trades on PAY after it's released earnings only if the stock falls back below its 50-day of $40.83 and $39 a share on high-volume. A high-volume drop below those levels should set this stock to re-test $37.50, or possibly trend even lower if the bears hammer this name post-earnings.

    ABM Industries

    Another potential earnings short-squeeze play is ABM Industries (ABM), which is set to report results on Tuesday after the market close. This company provides janitorial, parking, security and engineering services in the U.S. Wall Street analysts, on average, expect ABM Industries to report revenue of $1.08 billion on earnings of 36 cents per share.

    This company beat Wall Street analyst estimates last quarter by 4 cents per share. ABM Industries has seen its profits trend higher year-over-year by an average of 27.3% over the past five quarters. Revenue has trended higher for the past three straight quarters.

    The current short interest as a percentage of the float for ABM Industries is worth noting at 4.4%. That means that out of the 44.41 million shares in the tradable float, 2.33 million shares are sold short by the bears. The bears have also been increasing their bets from the last reporting period by 10.5%, or by about 221,400 shares. This isn’t a huge short interest, but a decent short-squeeze could develop if the bears are pressing to hard into this quarter.

    From a technical standpoint, ABM is currently above its 50-day moving average and below its 200-day moving average, which is neutral trendwise. This stock has been in a strong uptrend since October, with shares making mostly higher highs and higher lows. That said, ABM has struggled to trade back above its 200-day moving average, which is cause for concern.

    If you’re bullish on ABM, I would wait until after it reports its results and buy the stock once it moves back above its 200-day moving average of $21.80 on high volume. Look for volume that’s tracking in close to or above its three-month average action of 218,221 shares. If we get that move, I would then add to any long positions once ABM trades above $23 a share with volume. Target a move back toward $24 to $26 a share if the bulls ramp ABM higher post-earnings.

    >>7 Stocks Rising on Unusual Volume

    I would avoid any long trades or short ABM after earnings if it drops below its 50-day moving average of $20.25 on heavy volume. I would then add to any short position if it trades below $18.90 with volume. Target a drop back toward $17.50 or possibly lower if the bears whack ABM down post-earnings.

    Peir 1 Imports

    An earnings short-squeeze play in the specialty retail complex is Peir 1 Imports (PIR), which is set to release numbers on Thursday before the market open. This is a specialty retailer of imported decorative home furnishings and gifts. Wall Street analysts, on average, expect Pier 1 Imports to report revenue of $378.69 million on earnings of 21 cents per share.

    If you’re looking for a stock that’s trending very strong heading into the quarter, then Pier 1 Imports is worth a strong look. This stock is trading right at its 52-week high of $13.87 as we approach their earnings report. This could be an early indication that that Pier 1 Imports is going to report a solid quarter. That said, if we get the solid quarter, it’s going to take strong forward guidance to see the stock trend much higher from current levels.

    The current short interest as a percentage of the float for Peir 1 Imports is reasonably high at 7.7%. That means that out of the 94.07 million shares in the tradable float, 7.31 million are sold short by the bears. The short-sellers have also been increasing their bets from the last reporting period by 13.2%, or by about 2,186,500 shares. The bears have added some sizable bets here, so any bullish earnings news could easily spark a solid short-squeeze for Pier 1 Imports.

    From a technical standpoint, PIR is currently trading above both its 50-day and its 200-day moving averages, which is bullish. This stock has been uptrending strong since forming a triple bottom at $8.83 to $8.60 a share from August to October. That strong uptrend has taken the stock from $8.83 to its current price of $13.86 in just a few months.

    If you’re bullish on PIR, I would wait until after they report their earnings and buy some shares if we get a breakout above $13.94 on high-volume. Look for volume that’s tracking in close to or above its three-month average action of 2,118,910 shares. If we get that action, then look for PIR to spike by 10% to 15% post-earnings.

    I would avoid getting long or would short PIR if the stock fails to break out after earnings and it drops back below some near-term support at $13.07 on high-volume. I would then add to any short positions once the stock drops below $12.22 (its 50-day) and $12 a share on high-volume. Target a drop back towards $11.24 (its 200-day), or possibly lower if the bears hammer this stock post-earnings.

    Pier 1 is one of Jim Cramer's Stocks to Watch this week.

    Stewart Enterprises

    An earnings short-squeeze play in the personal services complex is Stewart Enterprises (STEI), one of TheStreet Ratings' top-rated consumer services stocks, which is set to release numbers on Thursday after the market close. This is a provider of funeral and cemetery products and services in the death care industry in the U.S. Wall Street analysts, on average, expect Stewart Enterprises to report revenue of $127.79 million on earnings of 9 cents per share.

    This stock has been range bound between $5.11 and $6.62 a share for the past four months. A break outside of that range either way post-earnings will set this stock up for its next major trend. Shares of Stewart Enterprise are currently trading at $5.80, which is in the middle of the range.

    The current short interest as a percentage of the float for Stewart Enterprises is rather high at 15%. That means that out of the 77.19 million shares in the tradable float, 11.53 million are sold short by the bears. Since this stock is trading well below $10 a share, we could see a big percentage gain if a short squeeze does develop.

    From a technical standpoint, STEI is currently trading below both its 50-day and 200-day moving averages, which is bearish. This stock hit has failed at the upper-end of its range five times in the last two months. It has also failed to move back above its 200-day moving average since July. That said, the stock has seen buyers step in under $6 a share many times in the past five months.

    The way I would play STEI would be to wait until after it reports its results and buy the stock if it trades back above its 50-day moving average at $6.16 on strong volume. Look for volume that’s tracking in close to or above its three-month average of 446,878. If we get that move, I would then add to any long positions once the stock takes out $6.42 and $6.77 (200-day) on strong volume. Target a run back towards its $7.50 to $8 a share if the bears gain full control of this tock post-earnings.

    I would avoid any long trades in STEI if this stock fails to move back above its 50-day at $6.16 on high volume after reporting earnings.

    AAR

    My final earnings short-squeeze trade idea today is aerospace and defense player AAR (AIR), one of the top-yielding aerospace and defense stocks, which is set to release numbers on Thursday after the market close. This is a diversified provider of products and services to the worldwide aviation and government and defense markets. Wall Street analysts, on average, expect AAR to report revenue of $475.49 million on earnings of 46 cents per share.

    If you’re looking for a beaten-down stock ahead of the quarter, then you should take a strong look at AAR. This stock has been annihilated by the sellers, since shares have plunged from its July high of $31.52 to a recent low of $14.90. After hitting that low, the stock rebounded to over $20 a share, but has since then dropped back to around $16.70.

    The current short interest as a percentage of the float for AAR stands at 6.8%. That means that out of the 36.81 million shares in the tradable float, 2.62 million shares are sold short by the bears. The bears have also been increasing their bets from the last reporting period by 2.9%, or by about 74,300 shares.

    From a technical standpoint, AIR is currently trading below both its 50-day and 200-day moving averages, which is bearish. This stock has trended lower from its November high of $20.61 to its current price of $16.78. The stock is also down substantially from its July high of $31.52. Any bullish earnings news could easily spark a rebound in shares of AIR as the shorts look to lock in some of their big profits.

    If you’re bullish on this stock, I would wait until after it releases its results and buy the stock if it breaks out above $18.15 (its 50-day) and $18.49 on high-volume. Look for volume that’s tracking in close to or above its three-month average volume of 385,391 shares. If we see that action, I would then look to add to any long positions once AIR trades above $20.61 on strong volume. Target a run back toward the 200-day at $23.49, or possibly higher.

    I would get short AIR after earnings only if it trades back below some previous support levels at $15.78 and $14.17 a share on high volume. I would target a drop back towards $10.39 if those levels are taken out with big volume.

    To see more potential earnings short squeeze plays, including Synovis Life Technologies (SYNO), Nordson (NDSN) and Rick’s Cabaret International (RICK), 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.