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.
G-III Apparel Group
My first earnings short-squeeze trade idea is clothing and apparel player G-III Apparel Group (GIII), which is set to release numbers on Tuesday before the market open. Wall Street analysts, on average, expect G-III Apparel Group to report revenue of $489.93 million on earnings of 49 cents per share.
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Just recently, Buckingham recommended that investors maintain long positions in G-III Apparel Group ahead of its fourth-quarter EPS, which the firm expects to beat Street expectations. The firm has a buy rating on the stock.
The current short interest as a percentage of the float for G-III Apparel Group is pretty high at 8.8%. That means that out of the 16.80 million shares in the tradable float, 1.48 million shares are sold short by the bears. The bears have also been increasing their bets from the last reporting period by 9.3%, or by about 125,000 shares. If the bears get caught pressing their bets into a bullish quarter, then shares of GIII could easily rip sharply higher post-earnings as the shorts rush to cover some of their bets.
From a technical perspective, GIII is currently trending above both its 50-day and 200-day moving averages, which is bullish. This stock has been uptrending over the last month, with shares moving higher from its low of $64 to its recent high of $77.22 a share. During that move, shares of GIII have been making mostly higher lows and higher highs, which is bullish technical price action. That move has now pushed shares of GIII within range of triggering a near-term breakout trade.
If you're bullish on GIII, then I would wait until after its report and look for long-biased trades if this stock manages to break out above its 52-week high of $77.22 a share with high volume. Look for volume on that move that hits near or above its three-month average action of 316,923 shares. If that breakout materializes, then GII will set up to enter new 52-week-high territory, which is bullish technical price action. Some possible upside targets off that move are $85 to $90 a share.
I would simply avoid GIII 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 at $70.37 a share with high volume. If we get that move, then GIII will set up to re-test or possibly take out its next major support levels $64 to its 200-day moving average of $59.04 a share.
Francesca's
Another potential earnings short-squeeze play is retail boutiques chain operator Francesca's (FRAN), which is set to release its numbers on Wednesday before the market open. Wall Street analysts, on average, expect Francesca's to report revenue $94.33 million on earnings of 28 cents per share.
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The current short interest as a percentage of the float for Francesca's is extremely high at $17.5%. That means that out of the 41.19 million shares in the tradable float, 7.21 million shares are sold short by the bears. If the bulls get the earnings news they're looking for, then shares of FRAN could easily explode sharply higher post-earnings as the bears move quick to cover some of their positions.
From a technical perspective, FRAN is currently trending above its 50-day moving average and just below its 200-day moving average, which is neutral trendwise. This stock has been uptrending for the last month and change, with shares moving higher from its low of $17.74 to its recent high of $21.13 a share. During that move, shares of FRAN have been making mostly higher lows and higher highs, which is bullish technical price action. That move has now pushed shares of FRAN within range of triggering a near-term breakout trade post-earnings.
If you're in the bull camp on FRAN, 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 $21.13 to $22.60 a share with high volume. Look for volume on that move that hits near or above its three-month average action of 818,397 shares. If that breakout hits, then FRAN will set up to re-test or possibly take out its next major overhead resistance levels at $29.50 to $32 a share.
I would simply avoid FRAN 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 $19.59 a share with high volume. If we get that move, then FRAN will set up to re-test or possibly take out its next major support levels at $17.74 to $17.54 a share. If those levels get taken out with volume, then FRAN will set up to re-test or possibly take out its 52-week low of $15.62 a share.
Five Below
Another potential earnings short-squeeze candidate is specialty value retailer Five Below (FIVE), which is set to release numbers on Tuesday after the market close. Wall Street analysts, on average, expect Five Below to report revenue of $207.98 million on earnings of 45 cents per share.
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The current short interest as a percentage of the float for Five Below is extremely high at 22.2%. That means that out of the 46.73 million shares in the tradable float, 10.39 million shares are sold short by the bears. The bears have also been increasing their bets from the last reporting period by 3.5%, or by about 346,000 shares. If the bears get caught pressing their bets into a strong quarter, then shares of FIVE could easily spike sharply higher post-earnings as the shorts rush to cover some of their trades.
From a technical perspective, FIVE is currently trending above its 50-day moving average and below its 200-day moving average, which is neutral trendwise. This stock has been trending range bound over the last month, with shares moving between $36.59 on the downside and $40.14 on the upside. Market players should now watch for a potential breakout trade post-earnings if FIVE manages to take out the upper-end if of its recent sideways trading chart pattern.
If you're bullish on FIVE, 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 $39.21 to $40.14 a share and then once it clears its 200-day moving average of $41.83 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 starts, then FIVE will set up to re-test or possibly take out its next major overhead resistance levels at $45 to $48 a share.
I would avoid FIVE 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 $36.59 a share with high volume. If we get that move, then FIVE will set up to re-test or possibly take out its next major support levels at $34.77 to its 52-week low of $33.94 a share. Any high-volume move below $33.94 a share will then push FIVE into new 52-week-low territory, which is bearish technical price action.
Lindsay
Another earnings short-squeeze prospect is water management and road infrastructure products and services provider Lindsay (LNN), which is set to release numbers on Wednesday before the market open. Wall Street analysts, on average, expect Lindsay to report revenue of $162.89 million on earnings of $1.13 per share.
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The current short interest as a percentage of the float for Lindsay is extremely high at 37.2%. That means that out of the 12.58 million shares in the tradable float, 4.69 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 send shares of LNN soaring higher post-earnings as the bears rush to cover some of their bets.
From a technical perspective, LNN is currently trending below its 50-day moving average and just above its 200-day moving average, which is neutral trendwise. This stock has been downtrending badly for the last two months, with shares moving lower from its high of $92.66 to its intraday low of $79.74 a share. During that move, shares of LNN have been consistently making lower highs and lower lows, which is bearish technical price action.
If you're bullish on LNN, 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 $84.88 a share and then once it takes out some more near-term overhead resistance levels at $86.30 to $87 a share with high volume. Look for volume on that move that hits near or above its three-month average action of 207,797 shares. If that breakout hits, then LNN will set up to re-test or possibly take out its next major overhead resistance levels at its 52-week high of $94.50 a share.
I would simply avoid LNN or look for short-biased trades if after earnings it fails to trigger that breakout and then drops back below its 200-day moving average of $79.62 a share to more near-term support at $76 a share with high volume. If we get that move, then LNN will set up to re-test or possibly take out its next major support levels at $74 to its 52-week low of $71.13 a share. Any high-volume move below $71.13 will then push shares of LNN into new 52-week-low territory, which is bearish technical price action.
Lululemon Athletica
My final earnings short-squeeze play is athletic apparel player Lululemon Athletica (LULU), which is set to release numbers on Thursday before the market opens. Wall Street analysts, on average, expect Lululemon Athletica to report revenue of $516.80 million on earnings of 72 cents per share.
Just recently, Mizuho said it expects Lululemon Athletica to report an in-line fourth quarter but that commentary regarding higher SG&A and an earnings outlook below $2 could pressure shares. The firm has a neutral rating on the stock with a $48 per share price target.
The current short interest as a percentage of the float for Lululemon Athletica is very high at 20.2%. That means that out of the 21.06 million shares in the tradable float, 1.32 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 about 1.56 million shares. If the bears get caught pressing their bets into a bullish quarter, then shares of LULU could easily spike sharply higher post-earnings as the shorts jump to cover some of their trades.
From a technical perspective, LULU is currently trending below both its 50-day and 200-day moving averages, which is bearish. This stock has been downtrending over the last month, with shares moving lower from its high of $53.39 to its recent low of $46.40 a share. During that move, shares of LULU have been making mostly lower highs and lower lows, which is bearish technical price action. That said, shares of LULU have started to bounce off that $46.40 low and it's starting to move within range of triggering a near-term breakout trade post-earnings.
If you're in the bull camp on LULU, 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 $48.84 a share and then once it takes out more overhead resistance levels at $50.94 to $53.39 a share with high volume. Look for volume on that move that hits near or above its three-month average volume of 3.67 million shares. If that breakout hits, then LULU will set up to re-fill some of its previous gap-down-day zone from January that started near $60 a share.
I would avoid LULU 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 $46.40 to its 52-week low of $44.32 a share with high volume. If we get that move, then LULU will set up to enter new 52-week-low territory, which is bearish technical price action. Some possible downside targets off that move are $40 to $35 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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