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 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.
Vector Group
My first earnings short-squeeze play is tobacco player Vector Group (VGR), which is set to release numbers on Monday after the market close. Wall Street analysts, on average, expect Vector Group to report revenue $352.26 million on earnings of 58 cents per share.
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The current short interest as a percentage of the float for Vector Group is pretty high at 19.5%. That means that out of the 62.57 million shares in the tradable float, 12.22 million shares are sold short by the bears. The bears have also been increasing their bets from the last reporting period by 2.4%, or by about 289,000 shares. If the bears get caught pressing their bets into a bullish quarter, then shares of VGR could easily rip sharply higher post-earnings as the bears jump to cover some of their positions.
From a technical perspective, VGR is currently trending above both its 50-day and 200-day moving averages, which is bullish. This stock has been trending sideways for the last two months and change, with shares moving between $19.22 on the downside and $21.85 on the upside. Any high-volume move above the upper-end of its recent range post-earnings could trigger a major breakout trade for shares of VGR.
If you're bullish on VGR, 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 $21.76 a share to its 52-week high at $21.85 a share with high volume. Look for volume on that move that hits near or above its three-month average action of 1.16 million shares. If that breakout triggers post-earnings, then VGR will set up to enter new 52-week-high territory, which is bullish technical price action. Some possible upside targets off that breakout are $25 to $30 a share.
I would simply avoid VGR or look for short-biased trades if after earnings it fails to trigger that breakout and then drops back below its 50-day at $20.92 a share to more near-term support at $20.87 a share with high volume. If we get that move, then VGR will set up to re-test or possibly take out its next major support levels at $19.50 to $19.22 a share. Any high-volume move below those levels will then put $18.58 to its 200-day at $17.20 into range for shares of VGR.
SodaStream International
Another potential earnings short-squeeze trade idea is home beverage carbonation systems and related products player SodaStream International (SODA), which is set to release its numbers on Wednesday before the market open. Wall Street analysts, on average, expect SodaStream International to report revenue $117.96 million on earnings of 1 cent per share.
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The current short interest as a percentage of the float for SodaStream International is extremely high at 33%. That means that out of the 19.61 million shares in the tradable float, 6.50 million shares are sold short by the bears. This is a huge short interest on a stock with a very low tradable float. Any bullish earnings news could easily spark a monster short-squeeze for shares of SODA post-earnings.
From a technical perspective, SODA is currently trending just above its 50-day moving average and well below its 200-day moving average, which is neutral trendwise. This stock is bouncing a bit higher today right off its 50-day moving average of $41.46 a share. This bounce is coming after shares recently sold off from just over $46 a share to its low of $39.70 a share.
If you're in the bull camp on SODA, 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 at $43 a share with high volume. Look for volume on that move that hits near or above its three-month average action of 1.53 million shares. If that breakout hits post-earnings, then SODA will set up to re-test or possibly take out its next major overhead resistance levels at $46.30 to $47.30 a share. Any high-volume move above those levels will then give SODA a chance to tag $52 to$55 a share.
I would simply avoid SODA 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 $41.46 a share to more near-term support at $39.70 a share with high volume. If we get that move, then SODA will set up to re-test or possibly take out its next major support levels at $37 to its 52-week low of $35.27 a share. Any high-volume move below $35.27 will then push shares of SODA into new 52-week-low territory, which is bearish technical price action.
Plug Power
Another potential earnings short-squeeze candidate is alternative energy player Plug Power (PLUG), which is set to release numbers on Wednesday before the market open. Wall Street analysts, on average, expect Plug Power to report revenue $5.35 million on a loss of 5 cents per share.
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The current short interest as a percentage of the float for Plug Power is very high at 20%. That means that out of the 130.01 million shares in the tradable float, 26.06 million shares are sold short by the bears. If Plug Power can deliver the earnings news the bulls are looking for, then shares of PLUG could easily rip sharply higher post-earnings as the bears rush to cover some of their bets.
From a technical perspective, PLUG is currently trending above its 200-day moving average and below its 50-day moving average, which is neutral trendwise. This stock has been downtrending badly for the last month and change, with shares moving lower from its high of $8.48 to its recent low of $3.62 a share. During that downtrend, shares of PLUG have been mostly making lower highs and lower lows, which is bearish technical price action.
If you're bullish on PLUG, 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 $3.95 to $4.50 a share with high volume. Look for volume on that move that registers near or above its three-month average action of 46.60 million shares. If that breakout starts post-earnings, then PLUG will set up to re-test or possibly take out its next major overhead resistance levels at $5 to its 50-day moving average of $6.31 a share.
I would avoid PLUG 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 $3.62 a share with high volume. If we get that move, then PLUG will set up to re-test or possibly take out its next major support level at its 200-day moving average of $2.70 a share.
MagicJack VocalTec
Another earnings short-squeeze prospect is VoIP software and hardware provider MagicJack VocalTec (CALL), which is set to release numbers on Monday after the market close. Wall Street analysts, on average, expect MagicJack VocalTec to report revenue of $37.18 million on earnings of 49 cents per share.
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Recently, Canaccord said expressed confidence in Magicjack's improved customer care, return to the former pricing plan, new product launches and revised advertising campaign. The firm has the stock rated a buy with a $24 per share price target.
The current short interest as a percentage of the float for MagicJack is extremely high at 40%. That means that out of the 13.69 million shares in the tradable float, 5.51 million shares are sold short by the bears. The bears have also been increasing their bets from the last reporting period by 8.3%, or by about 420,000 shares. If the bears get caught pressing their bets into a strong quarter, then shares of CALL could easily trend sharply higher post-earnings as the shorts move quickly to cover some of their positions.
From a technical perspective, CALL is currently trending just below its 50-day moving average and above its 200-day moving average, which is neutral trendwise. This stock has been downtrending badly for the last month and change, with shares moving lower from its high of $25.37 to its recent low of $16.97 a share. During that move, shares of CALL have been making mostly lower highs and lower lows, which is bearish technical price action. That said, shares of CALL are now bouncing off its recent low of $16.97 a share and it's starting to move within range of triggering a near-term breakout trade.
If you're bullish on CALL, then I would wait until after its report and look for long-biased trades if this stock manages to break out above it 50-day moving average of $19.86 a share and then once it takes out some more near-term overhead resistance at $20.66 a share with high volume. Look for volume on that move that hits near or above its three-month average action of 914,289 shares. If that breakout materializes after earnings, then CALL will set up to re-test or possibly take out its next major overhead resistance levels at $23 to its 52-week high of $25.37 a share.
I would simply avoid CALL or look for short-biased trades if after earnings it fails to trigger that breakout and then drops below some key near-term support levels at $16.97 to $16.39 a share with high volume. If we get that move, then CALL will set up to re-test or possibly take out its next major support levels at its 200-day moving average of $15.22 a share to $13.50 a share.
Onconova Therapeutics
My final earnings short-squeeze play is biopharmaceutical player Onconova Therapeutics (ONTX), which is set to release numbers on Monday after the market close. Wall Street analysts, on average, expect Onconova Therapeutics to report revenue of $1.21 million on a loss of 74 cents per share.
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The current short interest as a percentage of the float for Onconova Therapeutics is very high at 19%. That means that out of the 12 million shares in the tradable float, 2.21 million shares are sold short by the bears. The bears have also been increasing their bets from the last reporting period by 9.5%, or by about 192,000 shares. If the bears get caught pressing their bets into a bullish quarter, then shares of ONTX could easily soar sharply higher post-earnings as the shorts move to cover some of their bets.
From a technical perspective, ONTX is currently trending well below both its 50-day and 200-day moving averages, which is bearish. This stock has been downtrending badly over the last three months and change, with shares moving lower from its high of $16.22 to its 52-week low of $5.25 a share. During that move, shares of ONTX have been consistently making lower highs and lower lows, which is bearish technical price action.
If you're in the bull camp on ONTX, 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 $5.76 to $5.83 a share with high volume. Look for volume on that move that hits near or above its three-month average volume of 347,179 shares. If that breakout hits post-earnings, then ONTX will set up to re-test or possibly take out its next major overhead resistance levels at $6.27 to its 50-day moving average of $6.42 a share.
I would avoid ONTX or look for short-biased trades if after earnings it fails to trigger that breakout, and then drops back below it 52-week low of $5.25 a share with high volume. If we get that move, then ONTX will set up to enter new 52-week-low territory, which is bearish technical price action. Some possible downside targets off that move are $4.50 to below $4 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 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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