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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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.
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GameStop
My first earnings short-squeeze play is multichannel video game, consumer electronics and wireless services retailer GameStop (GME- Get Report), which is set to release numbers on Thursday after the market close. Wall Street analysts, on average, expect GameStop to report revenue of $3.63 billion on earnings of $2.16 per share.
From a technical perspective, GME is currently trending above both its 50-day and 200-day moving averages, which is bullish. This stock has been uptrending strong over the last three months, with shares moving higher from its low of $31.40 to its recent high of $42.28 a share. During that uptrend, shares of GME have been making mostly higher lows and higher highs, which is bullish technical price action. that move has now pushed shares of GME within range of triggering a big breakout trade post-earnings.
If you're bullish on GME, 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 $42.28 to $43.96 a share and then above $44.10 to $44.70 a share with high volume. Look for volume on that move that hits near or above its three-month average action of 2.33 million shares. If that breakout hits post-earnings, then shares of GME will set up to re-test or possibly take out its next major overhead resistance level at its 52-week high of $46.59 a share. Any high-volume move above that level will then give GME a chance to tag or trend north of $50 a share.
I would simply avoid GME 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 $38.98 to more support at $38.71 a share and then below its 200-day moving average of $37.53 a share with high volume. If we get that move, then GME will set up to re-test or possibly take out its next major support levels at $34.21 to $34 a share.
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UTi Worldwide
The current short interest as a percentage of the float for UTi Worldwide is very high at 18.9%. That means that out of the 91.29 million shares in the tradable float, 17.30 million shares are sold short by the bears. This is a large short interest on a stock with a reasonably low tradable float. If this company can deliver the earnings news the bulls are looking for, then shares of UTIW could easily rip sharply higher post-earnings as the bears rush to cover some of their positions.
From a technical perspective, UTIW is currently trending above both its 50-day and 200-day moving averages, which is bullish. This stock has been uptrending incredibly strong for the last four months, with shares moving sharply higher from its low of $10.40 to its recent high of $14.18 a share. During that uptrend, shares of UTIW have been making mostly higher lows and higher highs, which is bullish technical price action. That move has now pushed shares of UTIW within range of triggering a major breakout trade post-earnings above some key overhead resistance levels.
If you're in the bull camp on UTIW, then I would wait until after its report and look for long-biased trades if this stock manages to break out above some key overhead resistance levels at $13.74 to $14.18 a share and then above its 52-week high of $14.75 a share with high volume. Look for volume on that move that registers near or above its three-month average volume of 739,970 shares. If that breakout develops post-earnings, then UTIW will set up to enter new 52-week-high territory, which is bullish technical price action. Some possible upside targets off that breakout are $17 to $20 a share.
I would simply avoid UTIW 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 $13.03 to $12.59 a share and then below its 50-day moving average of $12.40 a share with high volume. If we get that move, then UTIW will set up to re-test or possibly take out its next major support levels at $11.69 to $11.20 a share, or even its 200-day moving average of $11.05 a share.
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BlackBerry
Another earnings short-squeeze candidate is wireless communications solutions provider BlackBerry (BBRY - Get Report), which is set to release numbers on Friday before the market open. Wall Street analysts, on average, expect BlackBerry to report revenue of $802.29 million on a loss of 4 cents per share.
From a technical perspective, BBRY is currently trending below both its 50-day and 200-day moving averages, which is bearish. This stock has recently pulled back off its high of $11.45 to right around some key near-term support levels at $9.32 to around $9.10 a share. If those support levels can hold post-earnings, then shares of BBRY could reverse its recent downtrend and trigger a near-term breakout trade.
If you're bullish on BBRY, 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 $10.12 a share to its 50-day moving average of $10.22 a share with high volume. Look for volume on that move that hits near or above its three-month average action of 12.21 million shares. If that breakout kicks off post-earnings, then BBRY will set up to re-test or possibly take out its next major overhead resistance levels at $11.45 to around $12.75 a share.
I would avoid BBRY 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 $9.32 to $9.10 a share with high volume. If we get that move, then BBRY will set up to re-test or possibly take out its next major support levels at $8.65 to $8 a share, or even its 52-week low of $7.01 a share.
Winnebago Industries
Another earnings short-squeeze prospect is recreational vehicles player Winnebago Industries (WGO - Get Report), which is set to release numbers on Thursday before the market open. Wall Street analysts, on average, expect Winnebago Industries to report revenue of $253.26 million on earnings of 38 cents per share.
The current short interest as a percentage of the float for Winnebago Industries is pretty high at 15.7%. That means that out of 26.50 million shares in the tradable float, 4.18 million shares are sold short by the bears. This is a decent short interest on a stock with a very low tradable float. Any bullish earnings news could easily spark a large short-covering rally post-earnings for shares of WGO that forces the bears to cover some of their bets.
From a technical perspective, WGO is currently trending above both its 50-day and 200-day moving averages, which is bullish. This stock broke out on Monday above some near-term overhead resistance at $23.16 a share. That move is now quickly pushing shares of WGO within range of triggering a much bigger breakout trade post-earnings above some key overhead resistance levels.
If you're bullish on WGO, then I would wait until after its report and look for long-biased trades if this stock manages to break out above some key overhead resistance levels at $23.91 to $25.92 a share and then above $26.32 to $26.46 a share with high volume. Look for volume on that move that registers near or above its three-month average volume of 428,162 shares. If that breakout hits post-earnings, then WGO will set up to re-test or possibly take out its next major overhead resistance levels at $28.65 to $32.13 a share.
I would simply avoid WGO 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 $22 a share to its 50-day moving average of $21.54 a share with high volume. If we get that move, then WGO will set up re-test or possibly take out its next major support levels at $20.37 to its 52-week low of $18.82 a share.
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Neogen
My final earnings short-squeeze trading opportunity is diagnostic substances player Neogen (NEOG - Get Report), which is set to release numbers on Thursday before the market open. Wall Street analysts, on average, expect Neogen to report revenue of $70.59 million on earnings of 23 cents per share.
The current short interest as a percentage of the float for Neogen is notable at 4.3%. That means that out of the 35.36 million shares in the tradable float, 1.52 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 bears get the earnings news they're looking for.
From a technical perspective, NEOG is currently trending above both its 50-day and 200-day moving averages, which is bullish. This stock has been consolidating and trending sideways over the last month and change, with shares moving between $48.03 on the downside and $51.98 on the upside. Shares of NEOG have just started to bounce higher right above its 50-day moving average and it's now beginning to move within range of triggering a near-term breakout trade above the upper-end of its recent sideways trending chart pattern post-earnings.
If you're in the bull camp on NEOG, 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 $51.98 a share with high volume. Look for volume on that move that registers near or above its three-month average action of 156,118 shares. If that breakout triggers post-earnings, then NEOG will setup to enter new 52-week-high territory, which is bullish technical price action. Some possible upside targets off that breakout are $60 to $65 a share.
I would avoid NEOG 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 $48.95 a share and then below some key near-term support levels at $48.16 to $48.03 a share with volume. If we get that move, then NEOG will set up to re-test or possibly take out its next major support levels at $45.27 to its 200-day moving average of $44.24 a share.
By Roberto Pedone
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