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 very bullish technically 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.
Zagg
My first earnings short-squeeze trade idea is mobile accessory solutions player Zagg (ZAGG - Get Report) , which is set to release numbers on Tuesday after the market close. Wall Street analysts, on average, expect Zagg to report revenue of $82.94 million on earnings of 24 cents per share.
From a technical perspective, Zagg 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 and change, with shares moving higher off its low of $8.29 a share to its recent high of $10.75 a share. During that uptrend, shares of Zagg have been consistently making higher lows and higher highs, which is bullish technical price action. That move has now pushed this stock within range of triggering a near-term breakout trade post-earnings.
If you're bullish on Zagg, 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 $10.75 to around $11 a share with high volume. Look for volume on that move that hits near or above its three-month average action of 566,330 shares. If that breakout hits post-earnings, then this stock will set up to re-test or possibly take out its next major overhead resistance levels at $11.76 to it 52-week high of $12.74 a share.
I would simply avoid Zagg or look for short-biased trades if after earnings it fails to trigger that breakout and then drops back below both its 20-day moving average of $10.12 a share and its 50-day moving average of $9.91 a share and then below more near-term support at $9.67 a share with high volume. If we get that move, then this stock will set up to re-test or possibly take out its next major support levels at $9 to its 200-day moving average of $8.89, or even $8.29 a share.
Epizyme
Another potential earnings short-squeeze play is clinical stage biopharmaceutical player Epizyme (EPZM - Get Report) , which is set to release numbers on Wednesday before the market open. Wall Street analysts, on average, expect Epizyme to report revenue $570,000 on a loss of 6 cents per share.
The current short interest as a percentage of the float for Epizyme is rather high at 16%. That means that out of the 28.43 million shares in the tradable float, 4.56 million shares are sold short by the bears. The bears have also been increasing their bets from the last reporting period by 24.6%, or by about 900,000 shares. If the bears get caught pressing their bets into a bullish quarter, then this stock could easily rip sharply higher post-earnings as the bears move fast to cover some of their trades.
From a technical perspective, Epizyme 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, after shares found some buying interest at $8.27 to $8.48 a share. Following that potential bottom, shares of Epizyme have started to uptrend and move back above its 20-day moving average of $9.42 a share. That move is now starting to push this stock within range of triggering a near-term breakout trade above some key overhead resistance levels post-earnings.If you're in the bull camp on Epizyme, 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 $10.48 to its 50-day moving average of $10.61 a share and then above more key resistance at around $11 a share with high volume. Look for volume on that move that registers near or above its three-month average volume of 652,610 shares. If that breakout fires off post-earnings, then this stock will set up to re-test or possibly take out its next major overhead resistance levels at $13 to around $15 a share.
I would simply avoid Epizyme or look for short-biased trades if after earnings it fails to trigger that breakout and then drops back below its 20-day moving average of $9.42 a share and below more support around $9 a share with high volume. If we get that move, then this stock will set up to re-test or possibly take out its next major support levels at $8.48 to its 52-week low of $8.27 a share.
