Stock Quotes in this Article: ADBE, ALOG, KMX, MLHR, RAD

WINDERMERE, Fla. (Stockpickr) -- With earnings season in full swing on Wall Street, it’s the perfect opportunity for market-players to create a powerful watch list of stocks that are due to report numbers and 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 tradable short-squeezes 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 big short-covering rally is sparked by a bullish earnings report.

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    This is why I search 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, and 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. That 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 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 rip higher.

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

     

    Analogic

    My first earnings short-squeeze candidate is Analogic (ALOG), which is set to report its results on Tuesday after the market close. This is a technology company that designs and manufactures advanced medical imaging and security systems and subsystems sold to original equipment manufacturers and end users primarily in the health care and airport security markets. Wall Street analysts, on average, expect Analogic to report revenue of $120.05 million on earnings of 40 cents per share.

    This stock has been beaten down solidly in front of the quarter, with shares off from its July high of $56.98 a share to its current price of around $45 a share. Shares of Analogic have some major near-term support at $43 a share. If that level can hold after the report earnings, the stock could see a sharp short-covering rally.

    The current short interest as a percentage of the float for Analogic sits at 6.1%. That means that out of the 11.8 million shares in the tradable float, 764,539 are sold short by the bears. The bears have also been increasing their bets from the last reporting period by 7.4%, or about 52,300 shares. This extremely low float and notable short interest is the type of situation that can produce a large short squeeze if the bulls get the news they want.

    From a technical standpoint, this stock is currently trading below its 50-day and 200-day moving averages, which is bearish. During the past two months, the stock has been treading within a range of $50 to $43 a share. During that range-bound trading, the stock has failed at its 50-day moving average but held above $43 a share.

    If you’re bullish on this name, I would buy this stock after its report if that $43 level holds. I would jump in long off any strength and then add to any long position once the stock moves above $47.50 on strong volume. Look for volume that’s tracking in close to or above its three-month average action of 66,400 shares.

    I would short this name after earnings only if the stock losses that $43 area with heavy volume. A drop below $43 could set this stock up to test its next major previous support level at around $39 a share.

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    Adobe

    Another potential earnings short-squeeze play is Adobe Systems (ADBE), which is set to report results on Tuesday after the market close. This company offers a range of business, Web and mobile software and services used by professionals, knowledge workers, developers, marketers, enterprises and consumers for creating, managing, delivering, optimizing and engaging with content and experiences across multiple operating systems, devices and media. Wall Street analysts, on average, expect Adobe to report revenue of $1.03 billion on earnings of 54 cents per share.

    A JMP Securities analyst recently downgraded this stock from market perform to market outperform. The analyst cited growing concern about the success of the company’s enterprise business and about its ability to retain key management and sales personnel. The JMP analyst also cited global economic concerns that might have delayed purchases in the fiscal third quarter.

    If the JMP analyst is wrong, then this stock could be a good contrarian earnings play for a short-squeeze trade.

    The current short interest as a percentage of the float for Adobe is 3.1%. That means that out of the 491.60 million shares in the tradable float, 15.23 million are sold short by the bears. The bears have also been increasing their bets dramatically from the last reporting period by 15.6%, or by about 2 million shares. This isn’t a huge short interest, but it’s enough to squeeze some bears out of the stock if Adobe reports strong results and bullish guidance.

    From a technical standpoint, this stock is trading below its 50-day and 200-day moving averages, which is bearish. That said, the stock has started to uptrend in the last two months, with shares printing higher lows and higher highs.

    If you’re bullish on this name, I would wait until it reports earnings and then buy the stock once it trades above its 50-day moving average of $26.19 a share on strong volume. Look for volume that’s tracking in close to or above 7 million shares. I would target a move back toward the 200-day moving average of $31.17 a share or possibly even higher if the bulls gain full control of this stock post-earnings.

    I would get short this name only if the stock fails to get back above the 50-day moving average after its report. I would jump in short if that occurs and add to any position once the stock trades below $22.50 a share on heavy volume.

    Adobe shows up on this week's list of Jim Cramer's Stocks to Watch.

    Herman Miller

    An earnings short-squeeze play in the furniture sector is Herman Miller (MLHR), which is set to release numbers on Wednesday after the market close. This company engages in the research, design, manufacture and distribution of interior furniture systems, products and related services worldwide. Wall Street analysts, on average, expect Herman Miller to report revenue of $444.70 million on earnings of 32 cents per share.

    This company has a volatile track record of both beating and missing Wall Street estimates during the past fiscal year. Herman Miller’s profit has trended higher year over year by an average of more than three times over last five quarters.

    If you’re looking for an oversold earnings short-squeeze play this week, then Herman Miller is just what the doctor ordered. This stock has been destroyed during the last three months, falling from its July high of $28.91 a share to its current price of just over $17.50 a share.

    The current short interest as a percentage of the float for Herman Miller is notable at 5.6%. That means that out of the 57.19 million shares in the tradable float, 3.23 million are sold short by the bears. The bears have also been increasing their bets from the last reporting period by 3.6%, or about 71,300 shares.

    From a technical standpoint, this stock is currently trading significantly below its 50-day and 200-day moving averages, which is bearish. That said, the stock has started to form a sideways trading pattern during the last month and a half between around $20.40 and $16.50 a share. This sideways trading pattern could be signaling that the downtrend in the stock is over in the near-term.

    The way I would play this stock is to wait until after its report and buy the stock if it holds that $16.50 near-term support zone. I would jump into this stock long on any strength if $16.50 holds and then add to any long position above $18.38 a share. Look for upside volume that’s tracking in close to or above its three-month average action of 460,200 shares. Target a run back towards its 50-day moving average of $21 a share or possibly higher if the bulls want to run this post-earnings.

    I would only get short this name after earnings if the stock drops below that key support zone at $16.50 on heavy volume. I would target a drop back towards $14 a share or possibly lower if the bears want to knock this stock down post-earnings.

    CarMax

    An earnings short-squeeze play in the auto dealership sector is CarMax (KMX), which is set to release numbers on Thursday before the market open. This company, through its subsidiaries, operates as a retailer of used vehicles in the U.S. Wall Street analysts, on average, expect CarMax to report revenue of $2.62 billion on earnings of 51 cents per share.

    A research analyst at Goldman Sachs recently raised earnings estimates for CarMax ahead of the quarter. The analyst currently has a neutral rating on the stock with a $34 price target. It’s not a stretch of the imagination to think that a used car retailer could be seeing some strong business trends, considering how weak the current economic environment is.

    The current short interest as a percentage of the float for CarMax is 5.3%. That means that out of the 225.07 million shares in the tradable float, 11.98 million are sold short by the bears. There are enough short-sellers in the stock to spark a solid short-squeeze if CarMax can deliver strong results and bullish guidance.

    From a technical standpoint, this stock is currently trading below both its 50-day and 200-day moving averages, which is bearish. This stock has been beaten down from its July highs of $34.81 a share to a recent low of $25.18 a share. After hitting that low, the stock found some massive buying support around $25 a share and has since rallied nicely to its current price of just over $28.50 a share.

    The way I would play this name is to wait until after they report their results and buy the stock if it trades above its 50-day moving average of $29 and then above $29.79 a share on strong volume. Look for volume that’s tracking in close to or above its three-month average volume of 3 million shares. If the stock takes out those levels following earnings, then we could see a run back towards $32 or possibly higher if the bulls push some of the shorts to start covering their bets.

    I would short this name after earnings only if the stock fails to trade back above its 50-day moving average of $29 a share. If you see some big volume selling after earnings where the stock is held below its 50-day, then target a drop back towards $25 a share if the bears push this one lower.

    CarMax, one of the top holdings at Akre Management, was also featured in "5 Stocks for Opportunistic Earnings Traders."

    Rite Aid

    One more earnings short-squeeze play is Rite Aid (RAD), which is set to release numbers on Thursday before the market open. This company, through its subsidiaries, operates retail drugstores in the U.S., primarily offering pharmacy services. Wall Street analysts, on average, expect Rite Aid to report revenue of $6.22 billion on a loss of 17 cents per share.

    This battered company is in the middle of a turnaround that has yet to produce anything worth writing home about. On Sept. 6, the drugstore chain player reported a modest increase of 2.5% in same-store sales. This was a significant improvement over its July same-stores sales growth of 1.8%. That said, the stock showed some relative strength on Monday trading above its 200-day moving average of $1.12 a share in a down tape.
    The current short interest as a percentage of the float for Rite Aid is a rather large 10.4%. That means that out of the 644.25 million shares in the tradable float, 67.15 million are sold short by the bears. The bears have also been increasing their bets from the last reporting period by 9.2%, or by about 5.6 million shares.

    From a technical standpoint, this stock is currently trading above its 200-day moving average and below its 50-day moving average, which is neutral trendwise. Since late August, the stock has started to show some bullish trends with shares printing higher lows and higher highs as it now approaches its 50-day of $1.15 a share.

    The way I would play this name is to buy some shares after it releases their results if the stock trades above $1.15 to $1.20 a share on big volume. Look for a strong-volume move above those levels that’s tracking in close to or above its three-month average volume of 11.4 million shares. This name has the potential to run big if those levels are taken out post-earnings, possibly toward $1.34 to $1.38 a share, so be ready to trade this below-$1 name this week.

    To see more potential earnings short squeeze candidates, includingJefferies Group (JEF), Comtech Telecommunications (CMTL) and FactSet Research (FDS), 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.