Stock Quotes in this Article: ADTN, BBBY, KMX, PSMT, TITN

 WINDERMERE, Fla. (Stockpickr) -- Short-sellers hate being caught short a stock that reports a blowout quarter. 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 time frame 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 by waiting. That’s why it can be worth betting prior to the report -- but only if the stock is acting technically very bullish and you have a very strong conviction that it is going to rip higher. Just remember that even when you have that conviction and have done your due diligence, the stock can still get hammered if The Street doesn’t like the numbers or guidance.

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If you do decide to bet ahead of a quarter, then you might want to use options to limit your capital exposure. Heavily shorted stocks are usually the names that make the biggest post-earnings moves and have the most volatility. I personally prefer to wait until all the earnings-related news is out for a heavily shorted stock and then jump in and trade the prevailing trend.

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

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Adtran

My first earnings short-squeeze trade is communications networks player Adtran (ADTN), which is set to release numbers on Tuesday after the market close. Wall Street analysts, on average, expect Adtran to report revenue of $139.82 million on earnings of 8 cents per share.

During the last quarter, this company reported revenue of $139.8 million, and GAAP reported sales were 20% lower than the prior-year quarter’s $175.3 million. Also during the last quarter, non-GAAP EPS was 11 cents per share, and GAAP EPS was 6 cents per share, which was 88% lower than the prior-year quarter’s 49 cents per share.

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The current short interest as a percentage of the float for Adtran is very high at 16.7%. That means that out of the 61.78 million shares in the tradable float, 9.95 million shares are sold short by the bears. This is a large short interest, so market players should watch for any strength in shares of ADTN post-earnings, since it could spark a solid short-squeeze trade.

From a technical perspective, ADTN is currently trending below both its 50-day and 200-day moving averages, which is bearish This stock has been downtrending badly for the last two months, with shares falling from its high of $23.82 to its recent low of $18 a share. During that downtrend, shares of ADTN have been consistently making lower highs and lower lows, which is bearish technical price action. That said, shares of ADTN could rebound off current levels if the company can deliver bullish earnings news.

If you’re bullish on ADTN, then I would wait until after its report and look for long-biased trades if this stock manages to break out above some near-term overhead resistance levels at $20 to $21.30 a share with high volume. Look for volume on that move that hits near or above its three-month average volume of 1.02 million shares. If that breakout hits, then ADNT will set up to re-test or possibly take out its next major overhead resistance levels at $23 to $23.82 a share.

I would simply avoid ADTN or look for short-biased trades if after earnings it fails to trigger that breakout and then drops back below some key near-term support at $18 a share with high volume. If we get that move, then ADNT will set up to re-test or possibly take out its next major support levels at $16 to $15.22 a share.

PriceSmart

Another potential earnings short-squeeze play is international membership shopping warehouse clubs player PriceSmart (PSMT), which is set to release its numbers on Tuesday after the market close. Wall Street analysts, on average, expect PriceSmart to report revenue of $609.67 million on earnings of 77 cents per share.

The current short interest as a percentage of the float for PriceSmart is pretty high at 11.2%. That means that out of the 23.21 million shares in the tradable float, 2.09 million shares are sold short by the bears. This is a decent short interest on a stock with a relatively low float, so any bullish earnings news could easily set off a solid short-covering really for PSMT post-earnings.

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From a technical perspective, PSMT is currently trending above both its 50-day and 200-day moving averages, which is bullish. This stock has been uptrending strong for the last two months, with shares moving higher from its low of $70.02 to its recent high of $80.24 a share.

During that uptrend, shares of PSMT have been consistently making higher lows and higher highs, which is bullish technical price action. That move has now pushed shares of PSMT within range of triggering a near-term breakout trade post-earnings.

If you’re in the bull camp on PSMT, then I would wait until after its report and look for long-biased trades if this stock manages to break out above some near-term overhead resistance levels at $80.24 to $81.99 a share with high volume. Look for volume on that move that registers near or above its three-month average volume of 142,840 shares. If that breakout his, then PSMT will set up to re-test or possibly take out its 52-week high of $86 a share.

I would simply avoid PSMT or look for short-biased trades if after earnings it fails to trigger that breakout and then drops below both some near-term support at $77 a share and below its 50-day moving average at $75.87 a share with high volume. If we get that move, then PSMT will set up to re-test or possibly take out its 200-day moving average at $74.71 a share.

Titan Machinery

Another potential earnings short-squeeze candidate is owner and operator of a network of agricultural and construction equipment stores in the U.S. and Europe Titan Machinery (TITN), which is set to release numbers on Wednesday before the market open. Wall Street analysts, on average, expect Titan Machinery to report revenue of $692.78 million on earnings of 92 cents per share.
During the last quarter, this company reported revenue of $582.1 million and GAAP reported sales were 38% higher than the prior-year quarter’s $423 million. Also during the last quarter, GAAP EPS was 66 cents per share, which was 8.2% higher than the prior-year quarter’s 61 cents per share.

The current short interest as a percentage of the float for Titan Machinery is extremely high at 24.6%. That means that out of the 16.87 million shares in the tradable float, 4.20 million shares are sold short by the bears. This is a very high short interest on a stock with low tradable float. If the bulls get the earnings news they’re looking for, then shares of TITN could soar significantly higher post-earnings.

From a technical perspective, TITN is currently trending just above its 200-day moving average and below its 50-day moving average, which is neutral trendwise. This stock has been downtrending for the last month, with shares falling from its high of $29.95 to its recent low of $25.75 a share. During that downtrend, shares of TITN have been consistently making lower highs and lower lows, which is bearish technical price action. That said, shares of TITN have held above its 200-day moving average off that pullback so far.

If you’re bullish on TITN, then I would wait until after its report and look for long-biased trades as long as TITN is trending above its 200-day at $25.73 and then once it breaks out above its 50-day at $28.63 a share and above more resistance at $29.95 a share with high volume. Look for volume on that move that registers near or above its three-month average action of 333,082 shares. If we get that breakout, then TITN will set up to re-test or possibly take out its next major overhead resistance levels at $32 to $34 a share.

I would avoid TITN or look for short-biased trades if after earnings it fails to trigger that move, and then drops back below its 200-day moving average at $25.73 share with high volume. If we get that move, then TITN will set up to re-test or possibly take out its next major support levels $23 to $22 a share.

Bed Bath & Beyond

Another earnings short-squeeze prospect is chain of specialty retail stores operator Bed Bath & Beyond (BBBY), which is set to release numbers on Wednesday after the market close. Wall Street analysts, on average, expect Bed Bath & Beyond to report revenue of $3.39 billion on earnings of $1.68 per share.

During the last quarter, this company reported revenue of $2.70 billion and GAAP reported sales were 15% higher than the prior-year quarter’s $2.34 billion. Also during the last quarter, GAAP EPS was $1.03 per share, which was 8.4% higher than the prior-year quarter’s 95 cents per share.

The current short interest as a percentage of the float for Bed Bath & Beyond stands at 5.1%. That means that out of the 214.73 million shares in the tradable float, 11.13 million shares are sold short by the bears. The bears have also been increasing their bets from the last reporting period by 5.4%, or by about 568,000 shares. If the bears are caught pressing their bets into a bullish quarter, then we could easily get a decent short-squeeze for shares of BBBY post-earnings.

From a technical perspective, BBBY is currently trending above both its 50-day and 200-day moving averages, which is bullish. This stock has been uptrending strong for the last two months, with shares soaring higher from its low of $56.37 to its recent high of $65.38 a share. During that uptrend, shares of BBBY have been consistently making higher lows and higher highs, which is bullish technical price action. That move has now pushed shares of BBBY within range of triggering a near-term breakout trade post-earnings.

If you’re bullish on BBBY, then I would wait until after its report and look for long-biased trades if this stock manages to break out above some near-term overhead resistance levels at $65 to $65.38 a share with high volume. Look for volume on that move that hits near or above its three-month average action of 2.61 million shares. If that breakout triggers, then BBBY will set up re-fill some of its previous gap down zone from last September that started near $70 a share.

I would avoid BBBY or look for short-biased trades if after earnings it fails to trigger that breakout and then drops back below some key near-term support levels at $63 to $62 a share with high volume. If we get that move, then BBBY will set up to re-test or possibly take out its next major support levels at its 200-day at $60.87 a share to its 50-day at $60.24 a share. If those levels get taken out with volume, then BBBY will move within range of $58 to $57 a share.

CarMax

My final earnings short-squeeze trade idea is used car retailer CarMax (KMX), which is set to release numbers on Wednesday before the market open. Wall Street analysts, on average, expect CarMax to report revenue of $2.73 billion on earnings of 46 cents per share.

This company has beaten Wall Street profit estimates for seven of the last eight quarters. Over the last three quarters, year-over-year sales have jumped from 4% to 7% to 15%. During that timeframe, earnings per share have declined 4%, held steady, then jumped higher by 14% last quarter.

The current short interest as a percentage of the float for CarMax sits at 4%. That means that out of the 226.88 million shares in the tradable float, 9.12 million shares are sold short by the bears. This isn’t a huge short interest, but it’s more than enough to spark a solid short-covering rally post-earnings if CarMax gives the bulls the earnings news they’re looking for.

From a technical perspective, KMX is currently trending above both its 50-day and 200-day moving averages, which is bullish. This stock has been uptrending strong for the last six months, with shares soaring higher from its low of $31 to its recent high of $42.45 a share. During that uptrend, shares of KMX have been consistently making higher lows and higher highs, which is bullish technical price action. That move has now pushed shares of KMX within range of triggering a major breakout trade post-earnings.

If you’re in the bull camp on KMX, then I would wait until after its report and look for long-biased trades if this stock manages to print a new 52-week high above $42.45 a share with high volume. Look for volume on that move that hits near or above its three-month average volume of 1.42 million shares. If that breakout triggers, then KMX will enter new 52-week-high territory, which is bullish technical price action. Some possible upside targets off that move are $50 to $53 a share.

I would simply avoid KMX or look for short-biased trades if after earnings it fails to trigger that breakout, and then drops back below some near-term support levels at $40.34 to $40.10 a share with high volume. If we get that move, then KMX will set up to re-test or possibly take out its next major support levels at $38 to $37.71 a share.

To see more potential earnings short squeeze plays, 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 technical analysis for small- and large-cap stocks, options, futures, commodities and currencies. Roberto studied international business at the Milwaukee School of Engineering, and he spent a year overseas studying business in Lubeck, Germany. His work has appeared on financial outlets including CNBC.com and Forbes.com. You can follow Pedone on Twitter at www.twitter.com/zerosum24 or @zerosum24.