Stock Quotes in this Article: ABAX, FFIV, IRBT, RFMD, USNA

BALTIMORE (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 and 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.

----------------------------------------------------------

More From Stockpickr

  • 5 Breakout Stocks to Leverage the Rally
  • 4 Cheap Greek Stocks to Bet On
  • 5 Big Stocks to Trade for Gains
  • ----------------------------------------------------------

    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'll risk missing a lot of the move by waiting. That’s why it can be worth betting prior to the report -- but only if the stock is acting extremely bullish technically and you have a very strong conviction that it 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.

     

    RF Micro Devices

    My first earnings short-squeeze idea is semiconductor maker RF Micro Devices (RFMD), which is set to report its numbers on Tuesday after the market close. Wall Street analysts, on average, expect RF Micro Devices to report revenue of $227.32 million on earnings of 9 cents per share. During the previous quarter, the company reported 8 cents per share, beating Wall Street estimates of 7 cents per share.

    The current short interest as a percentage of the float for RF Micro Devices is a rather large 11%. That means that out of the 269.42 million shares in the tradable float, 30.19 million are sold short by the bears. The bears have also been increasing their bets from the last reporting period by 29.3%, or by around 6.8 million 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 has been uptrending strong during the last couple of months, with shares making mostly higher lows and higher highs. The stock is now approaching a breakout if it can clear $7.50 a share.

    If you’re bullish on RF Micro, I would buy this stock after its report if it can break out above $7.50 a share on solid volume. Look for volume that’s tracking in close to or above its three-month average volume of 8.46 million shares. Target a run back toward the next significant overhead resistance level at $8.50 a share, or possibly even higher if the bulls gain control of this stock post-earnings.

    I would only short this stock after earnings if it drops below some near-term support at $6.85 a share on heavy volume. I would add to any short position if the stock then takes out its 200-day moving average of $6.47 and its 50-day moving average of $6.39 on strong volume. Look to target a drop back toward $6 to $5.50 a share if the bears hammer this stock post-earnings.

    RF Micro, one of 8 Top George Soros Buys in the most recently reported quarter, also shows up in the portfolio of TPG-Axon Capital.

    Abaxis

    Another potential earnings short-squeeze trade is portable blood analysis systems maker Abaxis (ABAX), which is set to report results on Tuesday after the market close. Wall Street analysts, on average, expect Abaxis to report revenue of 37.88 million on earnings of 14 cents per share.

    If this medical equipment and supplies company can beat estimates and guide higher, then the stock could set up to break out post-earnings and trade significantly higher. The current short interest as a percentage of the float for Abaxis is notable at 12.9%. That means that out of the 21.58 million shares in the tradable float, 2.69 million are sold short by the bears.

    From a technical standpoint, this stock is currently trading above its 50-day moving average and below its 200-day moving average, which is neutral trendwise. During the past couple of months, the stock has found some big buying support at around $21.60 a share, and it's hit resistance near $26 a share. The stock is now approaching a breakout if the bulls can gain control of this stock post-earnings.

    >>5 Breakout Stocks to Leverage the Rally

    If you’re bullish on Abaxis, I would wait until after its report and buy the stock once it breaks out above $26 to $26.78 a share, its 200-day, on big volume. Look for volume on the breakout that’s tracking in close to or above its three-month average action of 186,000 shares. If that breakout hits, then look for the stock to make a run at its next significant overhead resistance level of $30.50 a share or possibly even higher.

    I would only get short this stock after they report if it fails to breakout and then drops below its 50-day moving average of $24.07 a share on strong volume. I would then add to any short position once the stock takes out $21.60 a share with volume. Target a drop back below $20 a share or possibly even lower if the shorts smack this down post-earnings.

    Usana Health Sciences

    One earnings short-squeeze play in the consumer non-cyclical sector is science-based nutritional and personal care products maker Usana Health Sciences (USNA), which is set to release numbers on Tuesday after the market close.. Wall Street analysts, on average, expect Usana Health Sciences to report revenue of $142.30 million on earnings of 76 cents per share.

    This stock has been trending very strong heading into the quarter, with shares up from its August low of $23.10 to its current price of just over $31 a share. The stock is now setting up for a big breakout if they can deliver what the bulls are looking for.

    >>5 Stocks Setting Up to Break Out

    The current short interest as a percentage of the float for Usana Health Sciences is an extremely large 34%. That means that out of the 6.89 million shares in the tradable float, 2.35 million are sold short by the bears. This is a very low-float, high-short-interest situation, so this is one name I expect to make a big move post-earnings.

    From a technical standpoint, this stock is currently trading above both its 50-day and 200-day moving averages, which is bullish This stock has been uptrending nicely for the past few months with shares making mostly higher lows and higher highs. The stock now sets up for a big breakout if it can manage to take out $33 to $34.50 post-earnings.

    The way I would play Usana is to wait until after its report and buy the stock if it breaks out above $33 to $34.50 a share with strong volume. Look for volume that’s tracking in close to or above its three-month average action of 106,500 shares. If those levels are taken out to the upside, I would then target a run back towards its next significant overhead resistance level of $38.50 a share or possibly even higher.

    >>Stocks Rising on Unusual Volume

    I would only get short this stock after they report earnings if it drops below $29 a share on heavy volume. I would then add to any short position once it takes out $27.06 (50-day) with volume. Target a drop back towards $25.50 or possibly even lower if the shorts smack this down post-earnings.

    F5 Networks

    One earnings short-squeeze play in the computer networks sector is F5 Networks (FFIV), which is set to release numbers on Tuesday after the market close. Wall Street analysts, on average, expect F5 Networks to report revenue of $308.51 million on earnings of 98 cents per share.

    This company has racked up double-digit year-over-year revenue growth for the past four quarters. During that timeframe, the company has averaged growth of 36.7%, with the largest growth coming in the fourth quarter of last year when revenue clocked in at 45.2%. F5 Networks has seen its net income trend higher in the past three straight quarters, by 54.4% in the third quarter, 67.7% in the second quarter and 90.1% in the first quarter.

    F5 Networks has beaten Wall Street estimates in the last four quarters and is coming off a quarter in which it beat estimates by 6 cents, reporting net income of 77 cents per share vs. the Wall Street average estimate of 71 cents per share.

    The current short interest as a percentage of the float for F5 Networks sits at 4.6%. That means that out of the 80.24 million shares in the tradable float, 3.69 million are sold short by the bears. The bears have also been increasing their bets from the last reporting period by 6%, or by around 206,900 shares. If the short-sellers are caught leaning too hard into this report, then we could easily see a large short-squeeze kickoff for FFIV.

    From a technical standpoint, this stock is currently trading below its 200-day moving average and above its 50-day moving average, which is neutral trendwise. During the past couple of months, this stock found a ton of buying support at $69 to $72 a share. Shares of since rallied off that support zone to its current price of just over $90 a share.

    The way I would play F5 is to wait until after it report its results and buy this stock if it trades back above some near-term overhead resistance at $93.99 a share and above its 200-day moving average of $99.98 a share on big volume. Look for volume that’s tracking in close to or above its three-month average volume of 2.7 million shares. Keep in mind that it’s very important that the stock takes out its 200-day moving average post-earnings. If those levels are taken out post-earnings, then this stock could easily run toward $110 a share or possibly even higher.

    I would short this name after its report only if the stock drops below $85 a share on big volume. I would add to any short position once the stock then takes out its 50-day moving average of $84.79 a share on strong volume. I would target a drop back toward $75 or possibly even lower if the bears hammer this stock lower post-earnings.

    F5, one of the top holdings of Navellier & Associates, shows up on a list of 10 Stocks That May Outperform Through 2011.

    iRobot

    My final earnings short-squeeze candidate today is robot builder and designer iRobot (IRBT), which is set to release numbers on Tuesday after the market close. Wall Street analysts, on average, expect iRobot to report revenue of $119.14 million on earnings of 26 cents per share.

    This stock is trading around 10 points off of its 52-week high of $39 a share heading into this quarter. If the company can deliver some strong results and guide significantly higher, then the stock could be setting up for a big breakout post-earnings.

    The current short interest as a percentage of the float for iRobot is a rather large 15.8%. That means that out of the 24.35 million shares in the tradable float, 3.84 million are sold short by the bears. This is a very small float and high short interest stock, so any good news that the bulls like could easily set off a large short-squeeze post-earnings.

    From a technical standpoint, this stock is currently trading above its 50-day moving average and below its 200-day moving average, which is neutral trendwise. This stock was hit hard after forming a double top pattern in July at $38 a share, since it hit a recent low of $22.46 a share. After hitting that low, the stock has rebounded sharply to its current price of just over $28 a share. The stock now sets up to break out over $30.50 a share if we get a bullish earnings report.

    If you’re bullish on iRobot, one of the top-rated household durable goods stocks, I would wait until after they report and jump in long once the stock breaks out above $30.50 a share on heavy volume. Look for volume that’s tracking in close to or above its three-month average action of 435,350 shares. If that breakout triggers post-earnings, then look for this stock to make a big run at $36 a share or possibly even higher.

    I would only get short this stock after earnings if it takes out its 50-day moving average of $26.84 a share on heavy volume. A drop below that level and then below $26.10 a share should set this stock up to re-test its recent lows near 23 to $22.50 a share.

    iRobot shows up on a list of Stocks Set to Rebound in Second Half 2011.

    To see more potential earnings short squeeze candidates, including Human Genome Sciences (HGSI), Illumina (ILMN) and Microvision (MVIS), check out the Earnings Short Squeeze Plays portfolio on Stockpickr.

    -- Written by Roberto Pedone in Winderemere, Fla.

    RELATED LINKS:

    >>5 Stocks Setting Up to Break Out
    >>5 Rocket Stocks to Buy at End of October

    >>4 Cheap Greek Stocks to Bet On

    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.