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Heavily Shorted Stocks That Could Pop on Earnings - 15363 views
BALTIMORE (Stockpickr) -- News events have the power to create massive volatility in stocks -- and one event that can move them substantially higher or lower is an earnings release. Take that one step further and combine a bullish earnings report with a stock that’s heavily shorted, and you have the fuel that can ignite a large short squeeze in any stock.
Short-sellers hate being caught short a stock that produces earnings that please the bulls on Wall Street. When this happens, we often see tradable short squeezes develop as the bears rush to cover their positions and avoid even bigger losses. Even the best short-sellers know that it’s never a good idea to stay short once a big short-covering rally starts that’s sparked by an earnings event.
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 breakout 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.
However, 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 only 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.
My first earnings short-squeeze candidate is Sealy (ZZ), which is set to report its results on Tuesday after the market close. This company manufactures and markets a range of bedding products, including mattresses and mattress foundations. Wall Street analysts, on average, expect Sealy to report revenue of $294.82 million on a break-even quarter of earnings of $0 cents per share.
I don’t expect great things from Sealy since the housing market remains weak, but since the company is coming off of such depressed levels, the stock could pop if management can tell a good story about their future prospects. Investors could easily get excited if Sealy has any visibility into the end of the falling home market.
The current short interest as a percentage of the float for ZZ is an extremely large at 29.6%. That means that out of the 32.68 million shares in the tradable float, 14.05 million are sold short by the bears. This is a very large short position on a stock with a reasonably low float.
From a technical standpoint, shares of ZZ have been hammered going into the quarter, dropping from its recent high of 2.99 to current levels of $2.40 a share. The stock is now trading below both the 50 and 200-day moving averages, which is bearish. That said, the stock has been making some near-term higher highs which could mean its setting up to change the bearish trend and head higher.
The way I would play this stock for a potential short squeeze trade is to buy some shares if you see $2.45 taken out to the upside following their report. That level is a past support zone that has now turned into resistance for the stock. A move above $2.45 should spur some solid short-covering action in this stock.
Another potential earnings short squeeze trade is Acuity Brands (AYI), which is set to report results on Wednesday before the open. This company, through its subsidiaries, engages in the design, production, and distribution of lighting fixtures, lighting controls and related products and services in North America and internationally. Wall Street analysts, on average, expect Acuity to report revenue of $447.59 million on earnings of 63 cents per share.
Just today, a KeyBanc analyst said that one of the best ways for investors to gain exposure to the lightning upgrade cycle longer term is through AYI. KeyBanc thinks that AYI will leverage its robust sales channel to sell higher value lighting systems, which will lead to an acceleration of their organic growth rate and drive margins higher.
The current short interest as a percentage of the float for AYI is 8.5%. That means that out of the 41.84 million shares in the tradable float, 3.66 million are sold short by the bears. This is a reasonable short interest that could lead to a solid short covering rally if AYI can beat numbers and raise guidance.
From a technical standpoint, AYI is currently trading below its 50-day volume and above its 200-day moving average. The stock has some longer-term support zones at around $52 to $53 a share. The stock has also recently bounced off of its 200-day with some solid buying volume which is positive.
The way I would play this stock for an earnings short squeeze trade is to buy it once if moves above both its 50-day moving average of $57.85 and above some near-term resistance at $58.27, after they report numbers. If you see that move on solid volume, then I would just in and look for a run back towards $61 or higher. Add to the position if it breaks out above $61.31 a share, which is the stocks 52-week high.
Acuity is one of the top holdings of John Keeley's Keeley Fund Management.
One earnings short-squeeze candidate that the shorts are swarming around is American Greetings (AM), which is set to release numbers on Wednesday before the market open. This company is engaged in the design, manufacture and sale of everyday and seasonal greeting cards and other social expression products. Wall Street analysts, on average, expect American Greetings to report revenue of $409.29 million on earnings of 78 cents per share.
This stock is already in an extremely strong uptrend with shares hitting a brand new 52-week high today going into the report. This is a troubling development if you’re short because it shows how strong the stock is despite all of the bears betting against it. If these guys report a solid number, the shorts are going to get crushed here with this kind of strength already present.
The current short interest as a percentage of the float for AM is a very large 18.7%. That means that out of the 36.82 million shares in the tradable float, 6.77 million are sold short by the bears. This is a very low float and high short interest. This is the type of setup that can produce massive short squeezes if the bulls get exactly what they’re looking for in the earnings report.
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From a technical standpoint, AM is flirting with a major breakout if the stock can manage to close above $24.75 by the end of the day today. A close above that level means the stock has cleared an area where it has hit resistance a number of times in the past few months.
Here’s how I would play AM: I would buy the stock after they report if you see the stock take out the next major past resistance level of $25.50 a share. That price is the key area to watch since it’s the three-year high. A move above that level will signal control for the bulls, especially if it’s cleared with volume. Watch for volume that looks poised to expand past the three-month average volume of 250,000 shares.
If you’re looking for an earnings short-squeeze candidate in the housing sector, then check out KB Home (KBH), which is set to release numbers on Wednesday before the market open. This company operates in homebuilding and financial services business, serving homebuyers in markets nationwide. Wall Street analysts, on average, expect KB Home to report revenue of $257.05 million on a loss of 32 cents per share.
We all know the housing market stinks right now, but that’s the prevailing wisdom so any good news from KB Home is going to set this stock off on fire, burning anyone short going into the quarter. All management has to do is tell the street that they see any signs of an end to the housing bear market, and traders will jump in here to squeeze the shorts.
The current short interest as a percentage of the float for KBH is a gigantic 36.4%. That means that out of the 65.38 million shares in the tradable float, 19.56 million are sold short by the bears. This is a huge short interest that could produce a massive squeeze if we get some bullish forecasts out of KBH.
From a technical standpoint, KBH is trading just above its 50-day moving average of $11.47 and just below its 200-day moving average of $12.34. Some very strong upside volume has recently been moving into the stock with a number of days easily exceeding the three-month average volume of 3.9 million shares.
My strategy for trading this into earnings is to wait until after they report and buy the stock once it takes out some near-term overhead resistance at $12.20 to $12.30 a share. If those levels get taken out with expanding upside volume, I would buy aggressively and then add if it moves above the next major overhead resistance zone at $13.60 a share.
KB Home, one of the top-tielding materials and construction stocks, shows up on a recent list of 5 Homebuilder Stocks for the Ultimate Contrarian and was highlighted recently in "5 Earnings Stocks to Trade for Gains."
One final stock that could see an earnings inspired short squeeze is Xyratex (XRTX), which is set to release numbers on Thursday after the market close. This company is a provider of modular enterprise-class data storage subsystems and storage process technology. Xyratex designs, develops and manufactures technology that provides its customers with data storage products to support storage and data communication networks. Wall Street analysts, on average, expect Xyratex to report revenue of $339.53 million on breakeven earnings of $0 per share.
I am putting Xyratex on the earnings short squeeze trading radar as a potential bounce play since the stock has sold off ridiculously hard in the last six months, from a high of $17.17 a share to its current price of around $10 a share. That’s a heck of a selloff, so any good news could spur a big short squeeze off those depressed levels.
The current short interest as a percentage of the float for XRTX is 8.1%. That means that out of the 30.18 million shares in the tradable float, 1.82 million are sold short by the bears. It’s worth noting that the bears have been increasing their bets from the last quarter by 10%, or by around 165,000 shares.
From a technical standpoint, shares of XRTX have recently found some buying support at around $8.60 to $9 a share. The stock also recently moved above its 50-day moving average of $9.57 a share.
I would avoid going long this stock for an earnings short squeeze trade if you see shares drop below that 50-day either after or prior to the report on heavy volume. I would look to go long and play this for a squeeze if you see XRTX take out $10.14 to $10.50 a share after the company reports on expanding upside volume. This tock could easily run back towards the 200-day moving average of $13.08 if we get some good news, so keep this on your radar.
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.
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.