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6 Earnings Stocks That Could Crush the Shorts - 17147 views
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 that can ignite a large short squeeze.
Short-sellers hate being caught short a stock that announces bullish earnings and forward guidance. When this happen, we often see a tradable short squeeze develop as the bears 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 earnings spark a big short-covering rally.
This is precisely why I search 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.
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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 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. That way, you can let the trend emerge after the market has digested all of the news.
That said, sometimes the stock is going to be in such high demand that you will miss a lot of the move. That’s why it’s worth betting prior to the report 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.
Sirius XM Radio
My first earnings short-squeeze candidate is Sirius XM Radio (SIRI), which is set to report its results on Tuesday before the market opens. This company is engaged in broadcasting music, sports, news, talk, entertainment, traffic and weather channels in the U.S. on a subscription fee basis through its two satellite radio systems. Wall Street analysts, on average, expect Sirius to report revenue of $752.57 million on earnings of 1 cent per share.
I am expecting a strong quarter out of Sirius driven by the recent robust numbers from Apple (AAPL) for its smartphone and iPad products. Sirius currently has apps that work with Apple’s iPad, iPhone and iPod touch, so strong Apple earnings should spill over to more sales for Sirius. It also has apps that work with other smartphones, such as Android models and BlackBerry phones. And let’s not forget that car sales on average are up from last year, which should be a big boast to Sirius' earnings since the company is heavily tied to the auto market.
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The current short interest as a percentage of the float for Sirius is a notable 7%. That means that out of the 3.88 billion shares in the tradable float, 274.57 million are sold short by the bears. It’s worth mentioning that those bears have been increasing their bets from the last reporting period by 1.3%, or about 3.5 million shares. This stock doesn’t have a small float, but with so many shorts in this name, it could easily see a decent short squeeze on strong earnings and bullish guidance.
From a technical standpoint, shares of Sirius are currently trading just below its 50-day moving average and above its 200-day moving average, which is neutral trend-wise for the stock. For the past two months, shares of Sirius have been making higher lows and that pattern will stay in place until the stock closes below $1.99 a share. The stock had been making higher highs until it recently broke that pattern a few weeks ago.
If you want to play Sirius for long trade, I would buy it after its report if you see the stock trade above $2.22 a share on heavy volume. I would add to any long position above $2.35 as long as the volume remains strong if the stock trades through that level. I would consider any move by Sirius above $2.44 with strong volume as very bullish since that will mean the stock is breaking out to new 52-week highs, and breaking out a past resistance level that has beaten back the bulls for some time now.
I would only short this stock post-earnings if Sirius slips below $1.99 a share on big volume. I would add to that position below $1.93 to $1.86 a share and look for a test of the 200-day moving average of $1.79 if the bears take total control of this stock following their report.
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Another under-$10 stock that’s a potential earnings short squeeze play is Glu Mobile (GLUU), which is set to report results on Tuesday after the market close. This company is engaged in designing, marketing and selling games for mobile phones. Wall Street analysts, on average, expect Glu Mobile to report revenue of $16.61 million on a loss of 4 cents per share.
Glu Mobile should be setting up here for a very strong quarter, also driven by Apple’s strong earnings numbers. Again, Apple’s core products such as its iPhone and iPad are the exact devices that Glu Mobile’s games are made for. Combine that with a recent strong report from Electronic Arts (ERTS), and we have a recipe here for a sizable beat from Glu Mobile. Electronic Arts just posted a twofold rise in net income and earnings per share from the year-earlier quarter.
The current short interest as a percentage of the float for Glu Mobile is a reasonably large 11.5%. That means that out of the 38.90 million shares in the tradable float, 5.52 million are sold short by the bears. The bears have also been increasing their bets from the last reporting period by 2.9%, or about 156,000 shares. Since this stock has such a small float and high short interest, this name could really explode higher if the bulls get what they want.
From a technical standpoint, shares of Glu Mobile is looking very strong going into the quarter with the stock finding buying interest today right off its 50-day moving average of $5.02 a share. The stock has also been making higher lows and higher highs for the past couple of months, which is bullish price action.
The way I would play Glu Mobile is to wait until after its report, then buy the stock if it holds above $5.02 to $4.95 a share. If those levels hold up after they report, then I would be an instant buyer of this stock. I would add to any long position above $5.25 a share and then add aggressively if you see Glu Mobile break out above $6.10 a share. A move above $6.10 would be a big deal since it would mean new 52-week highs and would mark a major breakout.
I would only short Glu Mobile if you see the stock trade below $4.95 following their report on huge volume. I would add to any bearish bets below $4.50 and then $4.20 if the bears gain control of this name following earnings.
Peet’s Coffee & Tea
One heavily shorted stock that could be ripe for a big earnings short squeeze is Peet’s Coffee & Tea (PEET), which is set to release numbers on Tuesday after the market close. This company is a specialty coffee roaster and marketer of fresh roasted whole bean coffee and tea. Wall Street analysts, on average, expect Peet’s Coffee & Tea to report revenue of $88.70 million on earnings of 32 cents per share.
My thesis for playing Peet’s is to piggyback off the recent blowout quarter from Green Mountain Coffee Roasters (GMCR), which led the stock to rocket higher due to its large short interest, jumping from under $90 a share to over $105 a share. If the coffee market is truly hot, then Peet’s could be setting up for a similar move.
The current short interest as a percentage of the float for Peet's is an extremely large 23.6%. That means that out of the 12.60 million shares in the tradable float, 2.98 million are sold short by the bears. This is an extremely low float with a high short interest, so a strong quarter out of Peet’s that is anything close to Green Mountain's could send this stock soaring.
From a technical standpoint, shares of Peet's recently put in a double-top chart pattern at around $62.86 to $62.53 a share. That said, the stock is still trading above both its 50-day and 200-day moving averages, which is bullish. The stock has also recently found some buying interest at around $57.50 a share.
If you want to play Peet's for the long side, I would wait until it reports and would be a bigger buyer as long as the stock holds above $57.50 a share. If it holds that price zone, you could enter this name and then add to any long position once it takes out $62.86 on big volume. One could also wait until the report and just buy Peet's if it breaks out above $62.86 on heavy volume.
I would short Peet's only if it breaks below $57.50 on big volume following its earnings report. I would add to any short trade if you see the stock trade through its 50-day moving average of $55.67 a share on strong volume.
Peet's is on Jim Cramer's list of stocks to watch this week, though his recommendation is to avoid the stock.
Another name in the coffee space to watch for an earnings short-squeeze trade this week is Caribou Coffee (CBOU), which is set to release numbers on Wednesday after the market close. This company is a specialty coffee roaster and marketer of fresh roasted whole bean coffee and tea. Wall Street analysts, on average, expect Caribou Coffee to report revenue of $73.55 million on earnings of 9 cents per share.
The current short interest as a percentage of the float for Caribou is a notable 8.3%. That means that out of the 13.49 million shares in the tradable float, 1.13 million are sold short by the bears. The bears have been upping their bets from the last reporting period by 8.1%, or by about 85,000 shares.
My play on Caribou is pretty simple: Just buy the breakout if we get it following the earnings report. That breakout will occur once Caribou trades above $15.09 a share. I would buy this stock very aggressively if we see that breakout happen on strong volume. The reason I would want to be in Caribou on a move above $15.09 a share is that it will mark a 52-week high and close to an all-time high for this stock.
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An earnings short-squeeze play in the communications equipment sector is Garmin (GRMN), which is set to release numbers on Wednesday before the market opens. This is a provider of navigation, communication and information devices and applications enabled by global positioning system technology. Wall Street analysts, on average, expect Garmin to report revenue of $633.75 million on earnings of 66 cents per share.
Like Sirius, this company should also benefit from a pickup in sales in the U.S. car market from last year. Garmin beat Wall Street estimates last quarter but missed estimates in the quarter prior to that one.
The current short interest as a percentage of the float for Garmin is an extremely large 20%. That means that out of the 107.40 million shares in the tradable float, 21.46 million are sold short by the bears. The bears have also been upping their bets from the last reporting period by 6%, or by about 1.2 million shares. If the bears are caught leaning the wrong way here and Garmin posts strong numbers and guides higher, then the stock could see a decent short-covering rally.
From a technical standpoint, shares of Garmin are currently trading below both the 50-day and 200-day moving averages, which is bearish. The stock has also been making lower highs for the past couple of months, which is also bearish. That said, the stock seems to be finding some buying support at around $32 to 31.50 a share.
The way I would play Garmin is to buy this stock following its report if it trades above the 50-day moving average at $33.10 and the 200-day moving average at $32.51 on strong volume. I would add to any long positions above $34 and then $34.50 if the stock continues to rip higher post-earnings. My target would be the 52-week high at $36.42 a share.
I would only short this stock after its report if you see shares drop below $31.21 on big volume. I would add to any short position below $30 a share if the bears want to drive this stock lower.
Garmin is one of the top-yielding electronics stocks.
One more earnings short-squeeze play is Approach Resources (AREX), which is set to release numbers on Tuesday after the market close. This company is an independent energy player engaged in the exploration, development, production and acquisition of oil and gas properties, focusing on oil and natural gas reserves in oil shale and tight sands. Wall Street analysts, on average, expect this company to report revenue of $27.46 million on earnings of 22 cents per share.
This stock has been ramping up nicely heading into the quarter, with shares up from $19.13 in mid-June to the current price of around$26 a share. That recent strength has me interested in this name going into its earnings report.
The current short interest as a percentage of the float for Approach Resources is a very big 21%. That means that out of the 24.44 million shares in the tradable float, 4.73 million are sold short by the bears. It’s worth noting that the bears have been increasing their bets dramatically from the last reporting period by 20.9%, or about 816,000 shares.
From a technical standpoint, shares of Approach Resources are currently trading above both the 50-day and 200-day moving averages, which is bullish. The stock has also been making higher lows since it hit $19.13 a share, and it’s been printing higher highs. The stock just found some buying support at around $25.25 a share, and there’s some past overhead resistance at around $28.37 a share.
I would be a buyer of this stock following the report once it trades above $28.37 a share on heavy volume. I would add to any long position aggressively if you see Approach Resources trade above $31 a share on strong volume following earnings. I would only short this name post-earnings if you see the stock drop below its 50-day moving average of $24.10 a share. I would add to any short position if it takes out $22 a share, and my target would be that $19 low from mid-June.
Approach Resources is one of T. Boone Pickens' holdings, as of the most recently reported period.
To see more potential earnings short squeeze candidates, including Central European Distribution (CEDC), Alnylam Pharmaceuticals (ALNY) and Boston Beer Company (SAM), check out the Earnings Short-Squeeze Plays portfolio on Stockpickr.
-- Written by Roberto Pedone in Winderemere, Fla.
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.