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.
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, let's take a look at several stocks that could experience big short squeezes when they report earnings this week.
21Vianet Group
My first earnings short-squeeze trading opportunity is China-based Internet data center services provider 21Vianet Group (VNET - Get Report), which is set to release numbers on Monday after the market close. Wall Street analysts, on average, expect 21Vianet Group to report revenue of $835.92 million on earnings of 26 cent per share.
The current short interest as a percentage of the float for 21Vianet Group is very high at 16.2%. That means that out of the 42.55 million shares in the tradable float, 6.92 million shares are sold short by the bears. If this company can deliver the earnings news the bulls are looking for, then shares of VNET could easily spike sharply higher post-earnings as the bears scramble to cover some of their short positions.
From a technical perspective, VNET is currently trending just above its 50-day moving average and below its 200-day moving average, which is neutral trendwise. This stock recently formed a double bottom chart pattern, after shares found buying interest over the last month at $16.16 to $15.95 a share. Following that bottom, shares of VNET have started to spike higher just above its 50-day moving average of $17.17 a share. That spike is now starting to push shares of VNET within range of triggering a major breakout trade post-earnings.
If you're bullish on VNET, 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 $18 to $19.34 a share with high volume. Look for volume on that move that hits near or above its three-month average action of 679,428 shares. If that breakout begins post-earnings, then shares of VNET will set up to re-test or possibly take out its next major overhead resistance levels at its 200-day moving average of $21.96 a share to $23 a share.
I would simply avoid VNET 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 $15.95 to $15.10 a share with high volume. If we get that move, then VNET will set up to re-test or possibly take out its next major support levels at its 52-week low of $14.23 a share to around $12 a share.
Westport Innovations
Another potential earnings short-squeeze trade is low-emission engine and fuel systems technologies provider Westport Innovations (WPRT - Get Report), which is set to release its numbers on Monday after the market close Wall Street analysts, on average, expect Westport Innovations to report revenue $27.44 million on a loss of 41 cents per share.
From a technical perspective, WPRT is currently trending above its 50-day moving average and well below its 200-day moving average, which is neutral trendwise. This stock has been trending sideways over the last few weeks, with shares moving between $6.74 on the upside and $5 a share on the downside. If this stock can manage to clear the upper-end of its recent sideways trending chart pattern post-earnings, then we could see a major breakout trade trigger for shares of WPRT.
If you're in the bull camp on WPRT, 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 $5.97 to $6.33 a share and then above $6.74 a share with high volume. Look for volume on that move that triggers near or above its three-month average volume 1.06 million shares. If that breakout gets set off post-earnings, then WPRT will set up to re-test or possibly take out its next major overhead resistance level at around $8 a share. Any high-volume move above $8 will then give WPRT a chance to re-fill some of its previous gap-down-day zone from last October that started near $11 a share.
I would simply avoid WPRT 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 $5 a share to its 50-day moving average of $4.38 a share with high volume. If we get that move, then WPRT will set up to re-test or possibly take out its next major support level at its 52-week low of $3.24 a share.
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Vera Bradley
Another earnings short-squeeze candidate is functional women's accessories retailer Vera Bradley (VRA - Get Report), which is set to release numbers on Wednesday before the market open. Wall Street analysts, on average, expect Vera Bradley to report revenue of $160.27 million on earnings of 45 cents per share.
The current short interest as a percentage of the float for Vera Bradley is extremely high at 37.8%. That means that out of the 21.66 million shares in the tradable float, 8.19 million shares are sold short by the bears. This stock sports a monster short interest and a very low tradable float. Any bullish earnings news could easily spark a large short-covering rally for shares of VRA post-earnings as the bears move fast to cover some of their positions.
From a technical perspective, VRA is currently trending below both its 50-day and 200-day moving averages, which is bearish. This stock has been consolidating and trending sideways over the last month or so, with shares moving between $18.76 a share on the downside and $20.55 a share on the upside. Shares of VRA have now started to spike higher off the lower-end of its recent range and it's beginning to push close to triggering a big breakout trade above the upper-end of that range post-earnings.
If you're bullish on VRA, 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 $20.27 to $20.55 a share and then above $20.69 to its 200-day moving average of $21.23 a share with high volume. Look for volume on that move that hits near or above its three-month average action of 382,615 shares. If that breakout triggers post-earnings, then VRA will set up to re-test or possibly take out its next major overhead resistance levels at $23.50 to $24.66 a share. Any high-volume move above those levels will then give VRA a chance to tag $28 a share.
I would avoid VRA or look for short-biased trades if after earnings it fails to trigger that breakout and then drops back below its 52-week low of $18.14 a share with high volume. If we get that move, then VRA 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 $13 a share.
Box
Another earnings short-squeeze prospect is cloud platform provider Box (BOX), which is set to release numbers on Wednesday after the market close. Wall Street analysts, on average, expect Box to report revenue of $57.99 million on a loss of $1.17 per share.
From a technical perspective, BOX has been trending sideways and consolidating over the last few weeks, with shares moving between $17.91 on the downside and $21 a share on the upside. This sideways price action is coming after shares of BOX dropped sharply from its IPO high in January at $24.39 a share to its recent low of $16.41 a share. If this stock can manage to bust above the upper-end its recent sideways trading price action post-earnings, then shares of BOX could easily trigger a major breakout trade.
If you're bullish on BOX, 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 $19.20 to $19.48 a share and then above $21 a share with high volume. Look for volume on that move that hits near or above its three-month average volume of 3.36 million shares. If that breakout materializes post-earnings, then BOX will set up to re-test or possibly take out its next major overhead resistance level at $24.39 a share.
I would simply avoid BOX 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 $18.32 to $17.91 a share with high volume. If we get that move, then BOX will set up re-test or possibly take out its next major support level at its all-time low of $16.41 a share.
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Zoe's Kitchen
My final earnings short-squeeze play is fast-casual Mediterranean cuisine restaurant player Zoe's Kitchen (ZOES), which is set to release numbers on Wednesday after the market close. Wall Street analysts, on average, expect Zoe's Kitchen to report revenue of $39.62 million on a loss of 5 cents per share.
The current short interest as a percentage of the float for Zoe's Kitchen is extremely high at 31.8%. That means that out of the 16.29 million shares in the tradable float, 5.18 million shares are sold short by the bears. The bears have also been increasing their bets from the last reporting period by 4.9%, or by about 4.94 million shares. If the bears get caught pressing their bets into a strong quarter, then shares of ZOES could easily spike sharply higher post-earnings as the shorts move fast to cover some of their trades.
From a technical perspective, ZOES is currently trending above both its 50-day and 200-day moving averages, which is bullish. This stock has been uptrending over the last two months, with shares moving higher from its low of $28.17 to its recent high of $35.65 a share. During that uptrend, shares of ZOES have been making mostly higher lows and higher highs, which is bullish technical price action. That move has now pushed shares of ZOES within range of triggering a big breakout trade post-earnings.
If you're in the bull camp on ZOES, 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 $35.65 to its all-time high of $38.42 a share with high volume. Look for volume on that move that registers near or above its three-month average action of 403,720 shares. If that breakout kicks off post-earnings, then ZOES will set up to enter new all-time-high territory, which is bullish technical price action. Some possible upside targets off that move are $40 to $45 a share, or even $50 a share.
I would avoid ZOES or look for short-biased trades if after earnings it fails to trigger that breakout, and then drops back below both its 50-day moving average of $31.64 a share and its 200-day moving average of $31.16 a share with high volume. If we get that move, then ZOES will set up to re-test or possibly take out its next major support levels $29.24 to around $28 a share, or even $27 a share.
By Roberto Pedone
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