Stock Quotes in this Article: APOL, AZZ, HELE, MOS, WOR

WINDERMERE, Fla. (Stockpickr) -- News events have the power to create big volatility in stocks, and the 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.

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.

>>5 Rocket Stocks to Buy for 2012

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 is going to be in such high demand that 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.

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

Apollo Group

My first earnings short-squeeze play is private education provider Apollo Group (APOL), which is set to report its results on Thursday after the market close. Wall Street analysts, on average, expect Apollo Group to report revenue of $1.16 billion on earnings of $1.18 per share.

During the last quarter, Apollo Group topped estimates by 9 cents after it reported a profit of $1.02 a share vs. the estimate of net income of 93 cents per share. That solid result marked the fourth quarter in a row that the company beat Wall Street estimates.

The current short interest as a percentage of the float for Apollo Group is decent at 8.3%. That means that out of the 106.81 million shares in the tradable float, 9.6 million are sold short by the bears.

From a technical standpoint, APOL is currently trading above both its 50-day and 200-day moving averages, which is bullish. This stock recently broke out above some past overhead resistance at $50 a share. Since breaking out over $50, shares of APOL have run to a recent high of $54.58, before pulling back to its current price at around $53.

If you’re bullish on APOL, I would get long after they report earnings if the stock can trigger a big breakout and trade above $54.58 with volume. Look for volume that’s tracking in close to or above its three-month average action of 1,781,790 shares. If we see a high-volume move over $54.58, then look APOL to make a run at $60 a share.

I would get short APOL after earnings if the stock drops below $51 a share with volume. A high-volume move below that near-term support level should set this stock up to re-test its 50-day moving average of $48.79, or possibly much lower if the bears pound this stock down after their report.

Apollo, one of Maverick Capital's top holdings, shows up on recent lists of 5 For-Profit Education Stocks With Upside and 7 Stocks JPMorgan Thinks You Should Buy.

Mosaic

Another stock with the potential to see an earnings short-squeeze is Mosaic (MOS), which is set to release results on Wednesday after the market close. This is a producer and marketer of concentrated phosphate and potash crop nutrients for the global agriculture industry. Wall Street analysts, on average, expect Mosaic to report revenues of $2.45 billion.

The current short interest as a percentage of the float for Mosaic sits at 3.1%. That means that out of the 446.15 million shares in the tradable float, 4.96 million are sold short by the bears.

From a technical standpoint, MOS is currently trading below both its 50-day and 200-day moving averages, which is bearish. This stock has dropped sharply from its October high of $62.65 to its current price of $52 a share. Now the stock is nearing some potential breakout levels that could be taken out off of a bullish earnings report.

If you’re looking to get long MOS, I would buy some shares after the report if the stock breaks out above $53.39 (its 50-day) and $54 with volume. Look for volume that’s tracking in close to or above its three-month average action of 5,900,300 shares. If those levels are taken out with volume, then look for MOS to make a run at $57 to $60 a share.

I would avoid MOS or get short if after its earnings report the stock drops below $50 a share with volume. A high-volume move below $50 should set this tock up to re-test $46.50 to $45 a share or possibly even lower if the bears hammer this stock post-earnings.

Mosaic, one of the top holdings at David Tepper's Appaloosa Management, shows up on recent lists of 5 Stocks Selected From the Toughest Screening Process and 7 Fertilizer Stocks hedge Funds Love.

AZZ

An earnings short-squeeze play in the electronic instruments and controls complex is AZZ (AZZ), one of TheStreet Ratings' top-rated scientific instrument stocks, which is set to release numbers on Friday before the market open. Wall Street analysts, on average, expect AZZ to report revenues of $117.70 million on earnings of 79 cents per share.

If you’re looking for a stock that’s been uptrending for the past month and that’s approaching a potential breakout heading into earnings, then AZZ is one to take a strong look at.

The current short interest as a percentage of the float for AZZ is worth mention at 4.4%. That means that out of the 12.01 million shares in the tradable float, 526,361 shares are sold short by the bears. This isn’t a huge short interest, but since the float is very small it’s more than enough to spark a big spike higher off any bullish earnings report.

From a technical standpoint, AZZ is currently trading above both its 50-day and 200-day moving averages, which is bullish. This stock has been uptrending since it hit a near-term bottom in late November at $38.02 a share. During that uptrend, AZZ has been making higher highs and higher lows, which is bullish price action. Now the stock is nearing a big breakout that could trigger off of a bullish earnings and guidance report.

If you’re bullish on AZZ, then I would look to be a buyer after it reports its results if the stock can take out $47.38 to $48.39 with volume. Look for volume that’s tracking in near or above its three-month average action o 73,851 shares. If we get that move, I would then add to any long positions once AZZ takes out $51 with volume. Target a run back toward 52.50 or possibly higher if the bulls take full control of this stock post-earnings.

I would avoid AZZ or get short this stock if after it reports earnings the stock trades below both its 50-day of $43.39 and 200-day of $43.85 with volume. A high-volume move below those key technical levels should set this stock up to refill a gap down to $40 a share. Look for some near-term support at $41.66 to get taken out to put that gap into play back to $40.

 

Helen of Troy

One earnings short-squeeze idea in the consumer cyclical complex is Helen of Troy (HELE), one of TheStreet Ratings' top-rated home appliance stocks, which is set to release numbers on Thursday before the market open. Wall Street analysts, on average, expect Helen of Troy to report revenue of $323.95 million on earnings of $1.03 per share.

During the last quarter, Helen of Troy missed estimates by 12 cents, coming in at net income of 74 cents per share vs. estimates of 62 cents per share. This company also missed Wall Street estimates during the fourth quarter of last fiscal year. Revenue has trended higher for the three straight quarters.

The current short interest as a percentage of the float for Helen of Troy sits at 3.5%. That means that out of the 29.11 million shares in the tradable float, 1.02 million are sold short by the bears.

From a technical standpoint, HELE is currently trading above both its 50-day and 200-day moving averages, which is bullish. This stock hit a recent low in October at $23.83 a share, and since then, it has trended higher to its current price of $31.50. Shares of HELE now setup to trigger a big breakout if the company can deliver results that the bulls are looking for.

If you’re bullish on HELE, I would wait until after it reports earnings and buy some shares if the stock breaks out above $31.92 with high volume. Look for volume that’s tracking in close to or above its three-month average action of 187,129 shares. If we get that action, I would then add to any long positions once HELE takes out $33 with volume. Target a run back toward $35 to $36.75 if the bulls push this stock significantly higher post-earnings.

I would avoid HELE altogether or get short this stock if after the report earnings it drops below its 50-day of $29.19 and its 200-day of $29.82 with volume. A high-volume move below those key technical levels should set this stock up to re-test $27 to $26 a share or possibly much lower if the bears slam this stock post-earnings.

Worthington Industries

One more earnings short-squeeze trade is Worthington Industries (WOR), which is set to release its numbers on Thursday before the market open. This is a diversified metals processing company, focused on steel value-added steel processing and manufactured metal products. Wall Street analysts, on average, expect Worthington Industries to report revenue of $589.39 million on earnings of 31 cents per share.

If you’re looking for another breakout candidate heading into earnings, then I would take a look at Worthington Industries. This stock has been stuck in a range for the past few months, between $18.66 on the upside and $14.44 on the downside. A move outside of that range should set this stock up for its next big trend post-earnings.

The current short interest as a percentage of the float Worthington Industries is rather high at 9.4%. That means that out of the 52.57 million shares in the tradable float, 4.95 million are sold short by the bears.

From a technical standpoint, WOR is currently trading above its 50-day moving average and below its 200-day moving average, which is neutral trendwise. This stock hit a bottom in September at $12.75 a share, and since then, it has uptrended strong to its current price of $17.50 a share. That uptrend now sets up WOR to break out of its trading range if the company can report solid results.

If you’re bullish on WOR, I would wait until after they report and buy the stock once it breaks out over $18.15 (its 200-day) and $18.66 a share on high volume. Look for volume that registers close to or above its three-month average action of 589,500 shares. If we get that action, I would then add to any long positions above $21 a share. Target a run back toward its 52-week high of $23.37 a share if the bulls gain full control of this stock post-earnings.

I would get short or avoid WOR only if after its report the stock drops below its 50-day moving average at $16.74 with volume. I would then add to any short positions once WOR takes out some near-term support at $15.50 with volume. Target a drop back toward $14.50 or possibly $13 if the bears hammer this stock down post-earnings.

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.

RELATED LINKS:

>>5 Tech Sector Stocks Funds Love
>>8 Stocks Rising on Unusual Volume

>>5 Stocks Insiders Are Snapping Up

Follow Stockpickr on Twitter and become a fan on Facebook.

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.