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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Netflix
My first earnings short-squeeze trade idea is Internet television network player Netflix (NFLX), which is set to release numbers on Wednesday after the market close. Wall Street analysts, on average, expect Netflix to report revenue of $1.41 billion on earnings of 94 cents per share.
The current short interest as a percentage of the float for Netflix is pretty high at 10.1%. That means that out of the 58.87 million shares in the tradable float, 5.94 million shares are sold short by the bears. This is a decent short interest on a stock with a relatively low tradable float. If the bulls get the earnings news they're looking for, then shares of NFLX could easily jump sharply higher post-earnings as the bears rush to cover some of their trades.
From a technical perspective, NFLX is currently trending below its 50-day moving average and above its 200-day moving average, which is neutral trendwise. This stock has been moving lower over the last few weeks, with shares falling from its high of $467.99 to its intraday low of $433 a share. During that downtrend, shares of NFLX have been consistently making lower highs and lower lows, which is bearish technical price action. That move has also started to push shares of NFLX back below its 50-day moving average.
If you're bullish on NFLX, then I would wait until after its report and look for long-biased trades if this stock manages to break out back above its 50-day moving average of $459.71 a share and then above some more key near-term overhead resistance at $467.99 a share with high volume. Look for volume on that move that registers near or above its three-month average action of 2.06 million shares. If that breakout develops post-earnings, then NFLX will set up to re-test or possibly take out its 52-week high of $489.29 a share. Any high-volume move above that level will then give NFLX a chance to make a run at or take out $500 a share.
I would simply avoid NFLX 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 $433 to $420 a share with high volume. If we get that move, then NFLX will set up to re-test or possibly take out its next major support level at its 200-day moving average of $412.80 a share.
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Wolverine World Wide
Another potential earnings short-squeeze play is men's footwear player Wolverine World Wide (WWW), which is set to release its numbers on Tuesday after the market close. Wall Street analysts, on average, expect Wolverine World Wide to report revenue $720.37 million on earnings of 59 cents per share.
The current short interest as a percentage of the float for Wolverine World Wide is pretty high at 9.9%. That means that out of the 98.55 million shares in the tradable float, 9.76 million shares are sold short by the bears. The bears have also been increasing their bets from the last reporting period by 14.2%, or by 1.21 million shares. If the bears get caught pressing their bets into a bullish quarter, then shares of WWW could easily rip sharply higher post-earnings as the bears rush to cover some of their positions.
From a technical perspective, WWW is currently trending slightly below both its 50-day and 200-day moving averages, which is bearish. This stock has been trending sideways for the last four months and change, with shares moving between $23.94 on the downside and $27.41 on the upside. Any high-volume move above the upper-end of its recent sideways trending chart pattern post-earnings could triggering a big breakout trade for shares of WWW.
If you're in the bull camp on WWW, then I would wait until after its report and look for long-biased trades if this stock manages to break out above both its 50-day moving average at $25.83 a share and its 200-day moving average at $26.77 a share and then above more key near-term resistance at $27.41 a share with high volume. Look for volume on that move that hits near or above its three-month average volume of 811,922 shares. If that breakout develops post-earnings, then WWW will set up to re-test or possibly take out its next major overhead resistance levels at $29.86 to $31 a share. Any high-volume move above $31 will then give WWW a chance to re-fill its previous gap-down-day zone from February that started near $34 a share.
I would simply avoid WWW 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 $24.55 a share to its 52-week low of $24 a share high volume. If we get that move, then WWW will set up to enter new 52-week-low territory, which is bearish technical price action. Some possible downside targets off that move are its next major support levels at $22 to $21 a share, or even $20 to $19 a share.
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Bank of the Ozarks
Another potential earnings short-squeeze candidate is regional banking player Bank of the Ozarks (OZRK), which is set to release numbers on Tuesday after the market close. Wall Street analysts, on average, expect Bank of the Ozarks to report revenue of $94.61 million on earnings of 39 cents per share.
The current short interest as a percentage of the float for Bank of the Ozarks is notable at 9.6%. That means that out of the 70.43 million shares in the tradable float, 6.80 million shares are sold short by the bears. The bears have also been increasing their bets from the last reporting period by 8%, or by 504,000 shares. If the bears get caught pressing their bets into a strong quarter, then shares of OZRK could easily jump sharply higher post-earnings as the bears rush to cover some of their trades.
From a technical perspective, OZRK is currently trending below both its 50-day and 200-day moving averages, which is bearish. This stock has been downtrending for the last month, with shares moving lower from its high of $34.67 to its recent low of $29.92 a share. During that downtrend, shares of OZRK have been consistently making lower highs and lower lows, which is bearish technical price action. That said, shares of OZRK have now started to bounce off that $29.92 low and it's beginning to move within range of triggering a near-term breakout trade post-earnings.
If you're bullish on OZRK, then I would wait until after its report and look for long-biased trades if this stock manages to break out above both its 200-day moving average of $31.28 a share and its 50-day moving average of $31.97 a share with high volume. Look for volume on that move that registers near or above its three-month average action of 430,595 shares. If that breakout kicks off post-earnings, then OZRK will set up to re-test or possibly take out its next major overhead resistance levels at $34.67 to its 52-week high of $35.24 a share. Any high-volume move above those levels will then give OZRK a chance to make a run at $40 a share.
I would avoid OZRK 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 $29.92 a share with high volume. If we get that move, then OZRK will set up to re-test or possibly take out its next major support levels at $27.41 to $24 a share.
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MGIC Investment
Another earnings short-squeeze prospect is private mortgage insurance player MGIC Investment (MTG), which is set to release numbers on Wednesday before the market open. Wall Street analysts, on average, expect MGIC Investment to report revenue of $233.27 million on earnings of 10 cents per share.
The current short interest as a percentage of the float for MGIC Investment is very high at 13.8%. That means that out of 332.55 million shares in the tradable float, 45.92 million shares are sold short by the bears. If the bulls get the earnings news they're looking for, then shares of MTG could easily rip sharply higher post-earnings as the shorts move to cover some of their positions.
From a technical perspective, MTG is currently trending below both its 50-day and 200-day moving averages, which is bearish. This stock has been trending sideways for the last two months, with shares moving between $7.58 on the downside and $8.56 on the upside. Any high-volume move above the upper end of its recent sideways trading chart pattern post-earnings could easily trigger a breakout trade for shares of MTG.
If you're bullish on MTG, then I would wait until after its report and look for long-biased trades if this stock manages to break out above its 50-day moving average of $8.07 a share and its 200-day moving average of $8.49 a share and then above more near-term resistance at $8.56 a share with high volume. Look for volume on that move that hits near or above its three-month average action of 5.96 million shares. If that breakout begins post-earnings, then MTG will set up to re-test or possibly take out its next major overhead resistance level at its 52-week high of $9.50 a share. Any high-volume move above that level will then give MTG a chance to trend north of $10 a share.
I would simply avoid MTG or look for short-biased trades if after earnings it fails to trigger that breakout and then takes out some key near-term support levels at $7.58 a share to its 52-week low of $7.16 a share with high volume. If we get that move, then MTG will set up to enter new 52-week-low territory below $7.16, which is bearish technical price action. Some possible downside targets off that move are $6 to $5.50 a share.
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Del Frisco's Restaurant Group
My final earnings short-squeeze play is restaurant operator Del Frisco's Restaurant Group (DFRG), which is set to release numbers on Tuesday before the market open. Wall Street analysts, on average, expect Del Frisco's Restaurant Group to report revenue of $61.85 million on earnings of 8 cents per share.
The current short interest as a percentage of the float for Del Frisco's Restaurant Group sits at 5.5%. That means that out of the 23.50 million shares in the tradable float, 1.31 million shares are sold short by the bears. This isn't a huge short interest, but it's more than enough to spark a decent short covering rally post-earnings if the bulls get the earnings news they're looking for.
From a technical perspective, DFRG 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 three months and change, with shares falling from its high of $28.21 to its recent low of $18.81 a share. During that downtrend, shares of DFRG have been making mostly lower highs and lower lows, which is bearish technical price action. That said, shares of DFRG have started to spike modestly higher off that $18.81 low and it's now moving within range of triggering a near-term breakout trade post-earnings.
If you're in the bull camp on DFRG, then I would wait until after its report and look for long-biased trades if this stock manages to break out above some key near-term overhead resistance levels at $20.15 a share to its 50-day moving average of $21.31 a share with high volume. Look for volume on that move that hits near or above its three-month average action of 294,360 shares. If that breakout starts post-earnings, then DFRG will set up to re-test or possibly take out its next major overhead resistance levels at $23.07 to its 200-day moving average of $24.42 a share. Any high-volume move above those levels will then give DFRG a chance to make a run at $27 to $28 a share.
I would avoid DFRG or look for short-biased trades if after earnings it fails to trigger that breakout, and then drop below some key near-term support levels at $18.81 to $18.66 a share to its 52-week low of $17.53 a share with high volume. If we get that move, then DFRG will set up to enter new 52-week-low territory, which is bearish technical price action. Some possible downside targets off that move are its next major support levels at $15.63 to $13.75 a share.
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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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