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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Workday
My first earnings short-squeeze play is enterprise cloud applications player Workday (WDAY), which is set to release numbers on next Monday after the market close. Wall Street analysts, on average, expect Workday to report revenue of $205.11 million on a loss of 10 cents per share.
The current short interest as a percentage of the float for Workday is pretty high 9.1%. That means that out of the 98.06 million shares in the tradable float, 8.99 million shares are sold short by the bears. If the bulls get the earnings news they're looking for, then shares of WDAY could easily rip sharply higher post-earnings as the bears rush to cover some of their bets.
From a technical perspective, WDAY is currently trending above both its 50-day and 200-day moving averages, which is bullish. This stock has pulled back recently off its high of $97.40 to its low of $90.08 a share. Shares of WDAY are now starting to bounce a bit higher off that $90.08 low and it's approaching a possible breakout trade that could hit post-earnings.
If you're bullish on WDAY, 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 around $96 to $97.40 a share with high volume. Look for volume on that move that hits near or above its three-month average action of 1.47 million shares. If that breakout triggers post-earnings, then WDAY will set up to re-test or possibly take out its next major overhead resistance levels at $105 to $110, or even its 52-week high of $116.47 a share.
I would simply avoid WDAY or look for short-biased trades if after earnings it fails to trigger that breakout and then drops back below both its 50-day at $87.17 and its 200-day at $86.31 a share with high volume. If we get that move, then WDAY will set up to re-test or possibly take out its next major support levels at $72 to around $78 a share.
Post Holdings
Another potential earnings short-squeeze trade idea is diversified foods player Post Holdings (POST), which is set to release its numbers on next Monday after the market close. Wall Street analysts, on average, expect Post Holdings to report revenue $980.04 million on earnings of 7 cents per share.
The current short interest as a percentage of the float for Post Holdings is extremely high at 24.9%. That means that out of the 44.14 million shares in the tradable float, 10.87 million shares are sold short by the bears. This is a large short interest on a stock with a relatively low tradable float. Any bullish earnings news could easily trigger a large short-covering rally for shares of POST after earnings are announced.
From a technical perspective, POST is currently trending above its 50-day moving average and well below its 200-day moving average, which is neutral trendwise. This stock has just started to bounce right off some near-term support at $35 and off its 50-day moving average of $35.18 a share. That bounce is starting to push shares of POST within range of triggering a major breakout trade post-earnings.
If you're in the bull camp on POST, 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 $38 to $38.80 a share with high volume. Look for volume on that move that hits near or above its three-month average volume of 771,663 shares. If that breakout kicks off post-earnings, then POST will set up to re-fill some of its previous gap-down-day zone from August that started at $45 a share.
I would simply avoid POST or look for short-biased trades if after earnings it fails to trigger that breakout and then drops back below some near-term support at around $35 a share with high volume. If we get that move, then POST will set up to re-test or possibly take out its next major support level at its 52-week low of $30.94 a share.
Trina Solar
Another potential earnings short-squeeze candidate is integrated solar-power products maker Trina Solar (TSL), which is set to release numbers on next Monday before the market open. Wall Street analysts, on average, expect Trina Solar to report revenue of $645.68 million on earnings of 15 cents per share.
The current short interest as a percentage of the float for Trina Solar is extremely high at 24.5%. That means that out of the 76.94 million shares in the tradable float, 18.88 million shares are sold short by the bears. If the bulls get the earnings news they're looking for, then shares of TSL could easily rip sharply higher post-earnings as the bears move to cover some of their positions.
From a technical perspective, TSL is currently trending below both its 50-day and 200-day moving averages, which is bearish. This stock recently formed a double bottom chart pattern at $8.67 to $9.04 a share. Shares of TSL have now started to rebound off those support levels and it's quickly moving within range of triggering a major breakout trade post-earnings above some key near-term overhead resistance levels.
If you're bullish on TSL, 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 $10.72 to $11.19 a share and then above its 50-day moving average of $11.17 a share with high volume. Look for volume on that move that hits near or above its three-month average action of 5.17 million shares. If that breakout materializes post-earnings, then TSL will set up to re-test or possibly take out its next major overhead resistance levels at its 200-day moving average of $12.49 to $14 a share, or even $14.50 to $15 a share.
I would avoid TSL or look for short-biased trades if after earnings it fails to trigger that breakout and then drops back below some near-term support levels at $10 a share to those double bottom support levels at $9.04 to $8.67 a share with high volume. If we get that move, then TSL will set up to enter new 52-week-low territory below $8.67 a share, which is bearish technical price action.
Amira Nature Foods
Another earnings short-squeeze prospect is packaged specialty rice and other food products distributor Amira Nature Foods (ANFI), which is set to release numbers on next Monday after the market close. Wall Street analysts, on average, expect Amira Nature Foods to report revenue of $132.37 million on earnings of 32 cents per share.
The current short interest as a percentage of the float for Amira Nature Foods is extremely high at 26.6%. That means that out of 17.70 million shares in the tradable float, 4.72 million shares are sold short by the bears. The bears have also been increasing their bets from the last reporting period by 8.2%, or by 356,000 shares. If the bears get caught pressing their bets into a bullish quarter, then shares of ANFI could easily rip sharply higher post-earnings as the shorts move fast to cover some of their trades.
From a technical perspective, ANFI is currently trending above its 200-day moving average and just below its 50-day moving average, which is neutral trendwise. This stock just recently bounced higher off some near-term support at $15.25 a share. That bounce is starting to push shares of ANFI within range of triggering a near-term breakout trade post-earnings.
If you're bullish on ANFI, 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 $17 to $17.98 a share and then above more resistance at $18.52 a share with high volume. Look for volume on that move that registers near or above its three-month average action of 174,102 shares. If that breakout develops post-earnings, then ANFI will set up to re-test or possibly take out its next major overhead resistance levels at $19.86 to $20.29 a share, or even its 52-week high at $25 a share.
I would simply avoid ANFI 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 $15.25 to $14.75 a share with high volume. If we get that move, then ANFI will set up to re-test or possibly take out its next major support level at $13.66 to $12.24 a share.
Enanta Pharmaceuticals
My final earnings short-squeeze play is biotechnology player Enanta Pharmaceuticals (ENTA), which is set to release numbers on next Monday before the market open. Wall Street analysts, on average, expect Enanta Pharmaceuticals to report revenue of $3.81 million on a loss of 33 cents per share.
The current short interest as a percentage of the float for Enanta Pharmaceuticals is extremely high at 34.8%. That means that out of the 7.43 million shares in the tradable float, 2.59 million shares are sold short by the bears. The bears have also been increasing their bets from the last reporting period by 7.1%, or by 171,000 shares. If the bears get caught pressing their bets into a strong quarter, then shares of ENTA could easily soar sharply higher post-earnings as the shorts scramble to cover some of their trades.
From a technical perspective, ENTA is currently trending above both its 50-day and 200-day moving averages, which is bullish. This stock has been uptrending over the last four months, with shares moving higher from its low of $36.50 to its recent high of $48.49 a share. During that uptrend, shares of ENTA have been making mostly higher lows and higher highs, which is bullish technical price action. That move has now pushed shares of ENTA within range of triggering a major breakout trade post-earnings above some key near-term overhead resistance levels.
If you're in the bull camp on ENTA, 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 $45.45 to $46.48 a share and then above its all-time high of $48.49 a share with high volume. Look for volume on that move that registers near or above its three-month average action of 290,778 shares. If that breakout develops post-earnings, then ENTA will set up to enter new all-time-high territory above $48.49 a share, which is bullish technical price action. Some possible upside targets off that breakout are $55 to $60 a share, or even $65 a share.
I would avoid ENTA 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 its 50-day moving average of $42.36 to $41.61 a share with high volume. If we get that move, then ENTA will set up to re-test or possibly take out its next major support levels at its 200-day moving average of $39.79 to $38 or $37 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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