Stock Quotes in this Article: JBL, KMX, MLHR, MU, SAFM

WINDERMERE, Fla. (Stockpickr) -- News events have the power to create big volatility in stocks, and one event that can move them substantially higher or lower is an earnings release. Combine a bullish earnings report with a stock that’s heavily shorted, and you have the fuel to ignite a large short squeeze.

Short-sellers hate being caught short a stock that announces bullish earnings and forward guidance. When this happens, we often see a tradable short-squeeze develop as the bear rush to cover their positions and avoid huge losses. Even the most skilled short-sellers know that it’s never a great idea to stay short once an earnings event 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 couple of these candidates 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 from off a short squeeze. When you do this, 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 will miss 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 explode higher.

With that in mind, here’s a look at several stocks that could experience big short squeezes when they report earnings this week.

 

Jabil Circuit

My first earnings short-squeeze candidate is electronic instrument and controls player Jabil Circuit (JBL), which is set to report its results on Tuesday after the market close. Wall Street analysts, on average, expect Jabil Circuit to report revenue of $4.41 billion on earnings of 65 cents per share.

Last quarter, Jabil Circuit beat Wall Street estimates after reporting net income of 54 cents per share versus estimates of 49 cents per share. It missed estimates in the previous quarter, and it missed forecasts in the third quarter of the last fiscal year by 1 cent. Jabil Circuit has seen its net income trend higher for the last three straight quarters.

The current short interest as a percentage of the float for Jabil Circuit sits at 4.5%. That means that out of the 173.88 million shares in the tradable float 8.29 million are sold short by the bears. The short-sellers have also been increasing their bets from the last reporting period by 16.9%, or by about 1.2 million shares. If the bears are caught leaning too hard into this quarter, then we could easily see a short covering rally develop.

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From a technical standpoint, JBL is currently trading below both its 50-day moving average and right near its 200-day moving average, which is neutral trendwise. This stock has struggled during the past three months whenever it has traded near $21.40 a share. That level is stiff overhead resistance for JBL and will be until it can be taken out to the upside.

If you’re looking to get long JBL, I would buy some shares after it reports earnings if the stock can trade back above its 50-day moving average of $20.09 on heavy volume. Look for volume that’s close to or above its three-month average volume of 4,441,630 shares. If we get that action, I would then add to any long position once JBL takes out $21.40 with big volume.

I would avoid JBL completely if after its earnings report the stock fails to trade back above its 50-day moving average of $20.09 a share. I would get short JBL if it then drops below some big near-term support at $18.18 on heavy volume. Target a drop back towards $16.50 or possibly lower if the bears hammer this stock post-earnings.
 

Micron Technology

One earnings short-squeeze play in the semiconductor complex is Micron Technology (MU), which is set to release numbers on Wednesday after the market close. Wall Street analysts, on average, expect Micron Technology to report revenue of $2.14 billion on a loss of 6 cents per share.

Micron snapped its three-quarter streak of profitability last quarter after the company reported a loss of $135 million in the fourth quarter. Revenue has been trending down for the past two quarters, with a decline of 14.2% to $2.14 billion in the fourth quarter and a loss of 6.5% in the third quarter.

The current short interest as a percentage of the float for Micron Technology is decent at 6.7%. That means that out of the 959.14 million shares in the tradable float, 64.58 million are sold short by the bears. The short-sellers have also been increasing their bets from the last reporting period by a whopping 32.1%, or by about 15,693,000 shares.

From a technical standpoint, MU is currently trading below both its 50-day and 200-day moving averages, which is bearish. This stock has traded mostly inside of a sideways trading pattern the last three months, between $7 on the upside and around $5 on the downside. A move outside of that range should setup MU for its next big trend post-earnings.

If you’re looking to play MU for an earning short-squeeze play, then I would look to be a buyer after they report their results if the stock can manage to clear its 50-day moving average of $5.68 on heavy volume. Look for volume that’s tracking in near or above its three-month average action of 34.8 million shares. If we get that move, I would then add to any long positions once MU takes out $6.10 with volume. Target a run back towards $7 or possibly $7.42 if the bulls take control of this stock post-earnings.

I would avoid MU or get short this stock if after it reports earnings if the stock takes out support at $5.06 a share on high-volume. A high-volume move below that level should set this stock up to drop back towards its next significant support level at $3.97 a share or possibly even lower if the bears whack this name post-earnings.

One big bullish bet on Micron comes from David Tepper's Appaloosa Management, with an 8.8 million-share position in the stock.
 

Herman Miller

 

One earnings short-squeeze play in the furniture and fixtures complex is Herman Miller (MLHR), which is set to release numbers on Wednesday after the market close. Wall Street analysts, on average, expect Herman Miller to report revenue of $452.73 on earnings of 41 cents per share.

The current short interest as a percentage of the float for Herman Miller is decent at 6.2%. That means that out of the 57.26 million shares in the tradable float, 4.06 million are sold short by the bears. The bears have also been increasing their short positions from the last reporting period by 4.6%, or by about 15,200 shares.

From a technical standpoint, this stock is currently trading above both its 50-day and 200-day moving averages, which is bullish. This stock recently hit a 52-week low of $15.62 a share. Since printing that low, the stock has been uptrending and making mostly higher lows, which is bullish. That said, the stock has failed to make higher highs and it has some tough overhead resistance at $23.50 to $22 a share.

If you’re bullish on MLHR, I would wait until after it reports earnings and buy some shares if the stock breaks out above its 200-day of $22.45 and $23.50 on high volume. Look for volume that’s tracking in close to or above its three-month average action of 442,831 shares. If we get that action, then look for MLHR to short-squeeze toward $27 to $29 a share if the bulls push this higher post-earnings.

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I would avoid MLHR altogether or get short this stock if after the report it drops below $19 to $18.07 on high volume. A high-volume move below that level will set this stock up to re-test $16.50 to $15.60 a share if the bears pound this stock lower post-earnings.

CarMax

Another earnings short-squeeze trade is retailer of used cars CarMax (KMX), which is set to release its numbers on Wednesday before the market open. Wall Street analysts, on average, expect CarMax to report revenue of $2.25 billion on earnings of 38 cents per share.

This company has seen its revenue growth by double digits year over year for the last four straight quarters. Over that timeframe, revenue has trended up by an average of 18.7%. CarMax’s profits have also trended up for three straight quarters.

The current short interest as a percentage of the float CarMax is notable at 8.3%. That means that out of the 225.23 million shares in the tradable float, 18.75 million are sold short by the bears. This stock has more than enough bears involved to spark a tradable short squeeze if the bulls get the news they’re looking for.

From a technical standpoint, KMX is currently trading above both its 50-day and 200-day moving averages, which is bullish. This stock recently hit a 52-week low of $22.77 a share but since then has run up to its current price of $30.50. The stock now sets up to break out post-earnings if it can manage to take out some near-term overheads resistance levels.

If you’re bullish on KMX, I would wait until after it reports and buy the stock once it breaks out over $32.01 on high volume. Look for volume that registers close to or above its three-month average action of 2.8 million shares. I would then add to any long positions once KMX takes out $35 on big volume. Target a run back toward $37 to $38 if we get that action post-earnings.

I would only get short or avoid KMX if after its report the stock drops back below its 200-day of $29.93 and its 50-day at $29.20 on heavy volume. If those levels are taken out on high-volume, then look for KMX to drop back towards $26.65 a share. If that level is then taken out with volume, I would target an even bigger drop back towards $22.77.

CarMax shows up on a recent list of 10 Diversified Stocks to Buy Ahead of Earnings.

 

Sanderson Farms

Another stock with the potential to see an earnings short squeeze is food processing player Sanderson Farms (SAFM), which is set to release results on Tuesday before the market open. Wall Street analysts, on average, expect Sanderson Farms to report revenue of $535.53 million on a loss of 57 cents per share.

The current short interest as a percentage of the float for Sanderson Farms is an extremely large 22.8%. That means that out of the 17.03 million shares in the tradable float, 4.28 million are sold short by the bears. The bears have also been increasing their bets from the last reporting period by 4.7%, or by about 190,300 shares. This stock has a very low float and high short interest. This is a great recipe for a monster short-squeeze if the bulls get the earnings news they’re looking for.

From a technical standpoint, SAFM is currently trading above both its 50-day and 200-day moving averages, which is bullish. During the past three months, this stock has found buying support at around $48 to $49 a share, and it’s found stiff overhead resistance at $52.60 to $53.22 a share. A move outside of that range should set up this stock for its next major trend post-earnings.

If you’re bullish on SAFM, I would look to buy this stock after it reports its results if it can trigger a breakout over $53.22 a share on big volume. Look for volume that’s tracking in close to or above its three-month average volume of 308,655 shares. If we see that move, then look for SAFM to make a run at its next significant overhead resistance level of $57.97.

I would avoid SAFM or get short the stock if after its report it drops back below its 50-day moving average of $50.20 on high-volume. A high-volume move through that level should set this stock up to re-test its 200-day moving average of $45.80.

To see more potential earnings short squeeze candidates, 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.