DELAFIELD, Wis. (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.
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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.
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 Wall Street doesn't like the numbers or guidance.
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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Rayonier Advanced Materials
My first earnings short-squeeze trade idea is specialty cellulose fibers producer Rayonier Advanced Materials (RYAM), which is set to release numbers on Wednesday before the market open. Wall Street analysts, on average, expect Rayonier Advanced Materials to report revenue of $259.82 million on earnings of 66 cents per share.
The current short interest as a percentage of the float for Rayonier Advanced Materials is extremely high at 34.9%. That means that out of the 39.80 million shares in the tradable float, 13.91 million shares are sold short by the bears. This is a monster short interest on a stock with a relatively low tradable float. Any bullish earnings news could easily set off a large short-squeeze that sends the bears scrambling to cover some of their positions.
From a technical perspective, RYAM is currently trending below its 50-day moving average, which is bearish. This stock recently formed a double bottom chart pattern at $28.65 to $28.52 a share. Shares of RYAM have started to bounce modestly off those support levels and it's beginning to move within range of triggering a near-term breakout trade post-earnings.
If you're bullish on RYAM, 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 $30 to $31 a share and then above its 50-day moving average of $31.31 a share with high volume. Look for volume on that move that hits near or above its three-month average action of 1 million shares. If that breakout triggers post-earnings, then RYAM will set up to re-test or possibly takeout its next major overhead resistance levels at $33.44 to $33.65 a share, or $34.51 a share. Any high-volume move above $34.51 will then give RYAM a chance to re-fill some of its previous gap-down-day zone from July that started near $38 a share.
I would simply avoid RYAM or look for short-biased trades if after earnings it fails to trigger that breakout and then drops back below its all-time low of $28.52 a share (or below Tuesday's intraday low if lower) with high volume. If we get that move, then RYAM will set up to enter new 52-week-low territory, which is bearish technical price action. Some possible downside targets off that move are $25 to $20 a share.
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LifeLock
Another potential earnings short-squeeze play is proactive identity theft protection services provider LifeLock (LOCK), which is set to release its numbers on Wednesday after the market close. Wall Street analysts, on average, expect LifeLock to report revenue $120.72 million on earnings of 15 cents per share.
The current short interest as a percentage of the float for LifeLock is very high at 19.8%. That means that out of the 56.37 million shares in the tradable float, 11.15 million shares are sold short by the bears. The bears have also been increasing their bets from the last reporting period by 4.5%, or by 479,000 shares. If the bears get caught pressing their bets into a bullish quarter, then shares of LOCK could easily rip sharply higher post-earnings as the shorts move to cover some of their positions.
From a technical perspective, LOCK 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 five months, with shares moving higher from its low of $10.48 to its recent high of $16.09 a share. During that uptrend, shares of LOCK have been making mostly higher lows and higher highs, which is bullish technical price action. That move has now pushed shares of LOCK within range of triggering a big breakout trade post-earnings.
If you're in the bull camp on LOCK, then I would wait until after its report and look for long-biased trades if this stock manages to break out above some key overhead resistance levels at $16.09 to $17.03 a share with high volume. Look for volume on that move that hits near or above its three-month average volume of 939,997 shares. If that breakout kicks off post-earnings, then LOCK will set up to re-test or possibly take out its next major overhead resistance levels at $21.25 to its all-time high of $22.85 a share.
I would simply avoid LOCK or look for short-biased trades if after earnings it fails to trigger that breakout and then drops back below its 50-day moving average of $14.90 a share with high volume. If we get that move, then LOCK will set up to re-test or possibly take out its next major support levels at $14.04 to $13.64 a share. Any high-volume move below those levels will then give LOCK a chance to tag $13 to $12 a share.
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Knowles
Another potential earnings short-squeeze candidate is communication equipment player Knowles (KN), which is set to release numbers on Monday after the market close. Wall Street analysts, on average, expect Knowles to report revenue of $307.22 million on earnings of 41 cents per share.
The current short interest as a percentage of the float for Knowles is very high at 19.1%. That means that out of the 84.76 million shares in the tradable float, 16.23 million shares are sold short by the bears. If the bulls get the earnings news they're looking for, then shares of KN could easily rip sharply higher post-earnings as the bears rush to cover some of their trades.
From a technical perspective, KN is currently trending below its 50-day moving average, which is bearish. This stock has been downtrending badly over the last two months, with shares moving lower from its high of $33.82 to its recent new all-time low of $17.23 a share. During that move, shares of KN have been consistently making lower highs and lower lows, which is bearish technical price action. That said, shares of KN have started to bounce a bit off that all-time low of $17.23 a share and it's beginning to move within range of triggering a near-term breakout trade.
If you're bullish on KN, 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 $19.45 to $21 a share with high volume. Look for volume on that move that registers near or above its three-month average action of 1.72 million shares. If that breakout develops post-earnings, then KN will set up to re-test or possibly take out its next major overhead resistance levels at $24 to $25.46 a share, or even its 50-day moving average of $27.31 a share.
I would avoid KN 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 $18 to its all-time low of $17.23 a share with high volume. If we get that move, then KN will set up to enter new 52-week-low territory, which is bearish technical price action. Some possible downside targets off that move are $15 to $12 a share.
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Amedisys
Another earnings short-squeeze prospect is home health and hospice care services provider Amedisys (AMED), which is set to release numbers on Wednesday before the market open. Wall Street analysts, on average, expect Amedisys to report revenue of $299.26 million on earnings of 15 cents per share.
The current short interest as a percentage of the float for Amedisys is pretty high at 12.7%. That means that out of 28.17 million shares in the tradable float, 3.59 million shares are sold short by the bears. This is a large short interest on a stock with a very low tradable float. If the bulls get the earnings news they're looking for, then shares of AMED could easily soar sharply higher post-earnings as the bears move fast to cover some of their positions.
From a technical perspective, AMED is currently trending above both its 50-day and 200-day moving averages, which is bullish. This stock has been consolidating and trending sideways over the last three months, with shares moving between $19.03 on the downside and $22.58 on the upside. Any high-volume move above the upper end of its recent sideways trading chart pattern post-earnings could easily trigger a big breakout trade for shares of AMED.
If you're bullish on AMED, then I would wait until after its report and look for long-biased trades if this stock manages to break out above some key overhead resistance levels at $22.20 to its 52-week high at $22.58 a share with high volume. Look for volume on that move that hits near or above its three-month average action of 370,226 shares. If that breakout materializes post-earnings, then AMED will set up to enter new 52-week-high territory, which is bullish technical price action. Some possible upside targets off that breakout are $30 to $35 a share.
I would simply avoid AMED or look for short-biased trades if after earnings it fails to trigger that breakout and then drops back below its 50-day moving average of $20.70 a share and also below more key near-term support levels at $19.39 to $19.03 a share with high volume. If we get that move, then AMED will set up to re-test or possibly take out its next major support levels at its 200-day moving average of $16.78 a share to around $15 a share.
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Cliffs Natural Resources
My final earnings short-squeeze play is international mining and natural resources player Cliffs Natural Resources (CLF), which is set to release numbers on Monday after the market close. Wall Street analysts, on average, expect Cliffs Natural Resources to report revenue of $1.28 billion on a loss of 3 cents per share.
Just recently, Credit Suisse analyst Nathan Littlewood said in a report that Credit Suisse is very bullish in the short term for the coming earnings report for Cliffs Natural Resources, but the firm is more cautious in the longer term. Littlewood has an underperform rating on the stock with a $10 per share price target. Littlewood also said that the bulls could cause a short-squeeze in CLF when they report earnings, since he expects the firm to surprise Wall Street.
The current short interest as a percentage of the float for Cliffs Natural Resources is extremely high at 53.2%. That means that out of the 128.56 million shares in the tradable float, 68.46 million shares are sold short by the bears. The bears have also been increasing their bets from the last reporting period by 14.5%, or by 8.66 million shares. If the bears get caught pressing their bets into a strong quarter, then shares of CLF could easily jump sharply higher post-earnings as the shorts rush to cover some of their trades.
From a technical perspective, CLF is currently trending well below both its 50-day and 200-day moving averages, which is bearish. This stock has been downtrending badly for the last three months, with shares plunging lower from its high of $18.25 to its new 52-week low of $7 a share. During that downtrend, shares of CLF have been making mostly lower highs and lower lows, which is bearish technical price action. That said, shares of CLF have now started to rebound sharply off that $7 low and it's now quickly moving within range of triggering a big breakout trade above some key near-term overhead resistance levels.
If you're in the bull camp on CLF, 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 $9.73 to $9.96 a share with high volume. Look for volume on that move that registers near or above its three-month average action of 9.82 million shares. If that breakout gets underway post-earnings, then CLF will set up to re-test or possibly take out its next major overhead resistance levels at its 50-day moving average of $12.18 to $13 a share, or even $14 a share.
I would avoid CLF 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 $8.16 a share with high volume. If we get that move, then CLF will set up to re-test or possibly take out its next major support level at its 52-week low of $7 a share. Any high-volume move below that level will send shares of CLF into new 52-week-low territory, which is bearish technical price action.
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To see more potential earnings short squeeze plays, check out the Earnings Short-Squeeze Plays portfolio on Stockpickr.
-- Written by Roberto Pedone in Delafield, Wis.
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At the time of publication, author had no positions in stocks mentioned.
Roberto Pedone, based out of Delafield, Wis., 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.
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