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5 Earnings Stocks Poised to Pop
The Street | April 04, 2012 | 12:01 PM EDT

Short-sellers hate being caught short a stock that produces earnings that please the bulls. 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 timeframe 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. That’s why it can be worth betting prior to the report — but only if the stock is acting technically very bullish ans you have a very strong conviction that it is going to rip higher.

With that in mind, here’s a look at a number of stocks that could experience big short squeezes when they report earnings this week.

5. CarMax

My first earnings short-squeeze play is retailer of used cars CarMax, which is set to release its numbers on Thursday before the market open. Wall Street analysts, on average, expect CarMax to report revenues of $2.41 billion on earnings of 39 cents per share.

CarMax is looking to beat Wall Street estimates this quarter after missing estimates the last two quarters. Last quarter, it missed estimates after reporting net income of 36 cents per share versus an estimate of 38 cents per share. In the previous quarter, it missed estimates by 2 cents.

The current short interest as a percentage of the float for CarMax is notable at 6 percent. That means that out of the 225.39 million shares in the tradable float, 13.54 million shares are sold short by the bears. The bears have also been increasing their short positions from the last reporting period by 3.4 percent, or by about 441,000 shares. If the bears are caught leaning too strong into this quarter, then we could get a solid short-covering rally.

From a technical perspective, CarMax is currently trading above both its 50-day and 200-day moving averages, which is bullish. This stock has been trending strong during the past six months, with shares making mostly higher lows and higher highs. That’s bullish price action and now CarMax is trading within range of triggering a major breakout trade.

If you like the look of CarMax here, I would wait until after its report and look for long-biased trades if this stock breaks out above some near-term overheard resistance at $35.17, and then some past resistance at $37.02 with high volume. Look for volume that registers close to or above its three-month average action of 1.7 million shares. If we get that action, then look for this stock to trade above $40 a share in the near future.

I would simply avoid CarMax or look for short-biased trades if after earnings it fails to break out and then trades below some near-term support at $33.69 a share with heavy volume. Target a drop back towards its 200-day moving average of $30.04 a share or much lower if the bears hammer this down post-earnings.

4. Pier 1 Imports

An earnings short-squeeze trade idea in the specialty retail complex is Pier 1 Imports, which is set to report results on Thursday before the market open. This company is a specialty retailer of imported decorative home furnishings and gifts. Wall Street analysts, on average, expect Pier 1 Imports to report revenue of $472.09 million on earnings of 48 cents per share.

On Tuesday, KeyBanc increased its earnings per share estimates on Pier 1 Imports and raised its price target from $19 to $21. A Bank of America analyst reiterated a “buy” rating on Pier 1 Imports and raised the price target to $20 based on sales and margin gains.

The current short interest as a percentage of the float for Pier 1 Imports stands at 6.3 percent. That means that out of the 94.11 million shares in the tradable float, 5.99 million are sold short by the bears. This isn’t a huge short interest, but it’s more than enough to spark a decent rally if Pier 1 Imports can deliver the news the bull are looking for.

From a technical perspective, Pier 1 Imports is currently trading above both its 50-day and 200-day moving averages, which is bullish. This stock has been in a monster uptrend for the past six months, with shares rising from a low of $11.06 to its current price of $18.76 a share. During that uptrend, this stock has consistently made higher lows and higher highs, which is bullish technical price action.

If you’re bullish on Pier 1 Imports, I would wait until after they report and look for long-biased trades if the stock prints a new 52-week high and moves above $20 a share with high volume. Look for volume on that move that registers near or well above its three-month average action of 1.7 million shares. If we get that action, then look for Pier 1 Imports to trend higher towards $25 a share if the bulls gain full control of this stock post-earnings.

I would simply avoid Pier 1 Imports or look for short-biased trades if after earnings this stock fails to get above $20, and then drops below some near-term support at $17.71 a share with high-volume. If we get that move, then look for Pier 1 Imports to blow through its 50-day moving average of $17.03 and potential trend much lower. Some possible targets if the 50-day is taken out with volume are $15 to $14.50 a share.

3. Bed Bath & Beyond

Another potential earnings short-squeeze play in the specialty retail space is Bed Bath & Beyond, which is set to release numbers on Wednesday after the market close. This company sells an assortment of domestics merchandise and home furnishings, which include food, giftware, health-care and beauty-care items, and infant and toddler merchandise. Wall Street analysts, on average, expect Bed Bath & Beyond to report revenue of $2.66 billion on earnings of $1.33 per share.

If you’re looking for a strong uptrending stock that's trading just a few points off its 52-week high ahead of its quarterly earnings report, then make sure to check out shares of Bed Bath & Beyond. On Tuesday, this stock closed at $66.99 which is within earshot of its 52-week high of $68.20 a share. Shares of Bed Bath & Beyond are also up 15 percent so far in 2012.

The current short interest as a percentage of the float for Bed Bath & Beyond sits at 3.2 percent. That means that out of the 228.96 million shares in the tradable float, 7.54 million are sold short by the bears. This is far from a large short interest, but with the stock trading so close to a new 52-week high it’s more than enough to get the bears to do some short-covering off a strong report.

From a technical perspective, Bed Bath & Beyond is currently trading above both its 50-day and 200-day moving averages, which is bullish. This stock recently triggered a big breakout trade once it moved above some near-term overheard resistance at 63.60 to $63.83 with high-volume. Shares of Bed Bath & Beyond also just found some buying interest at around $65.55 a share, and it’s now within range of triggering another big breakout trade post-earnings.

If you’re a bull on Bed Bath & Beyond, I would wait until after its report and look for long-biased trades if the stock breaks out above $68.20 a share with heavy volume. Look for volume on that move that hits close to or well above its three-month average volume of 2.8 million shares. If we get that action, then look for Bed Bath & Beyond to trade well above $70 a share post-earnings.

I would avoid Bed Bath & Beyond or look for short-biased trades if the stock fails to trigger that breakout after earnings and then drops below some near-term support at $65.55 a share with high-volume. Target a drop back towards its 50-day moving average of $62.56 a share, or possibly down near its 200-day moving average at $59.58 a share if the bears whack this lower post-earnings.

2. Ruby Tuesday

One earnings short-squeeze candidate in the restaurant complex is Ruby Tuesday, which is set to release numbers on Wednesday after the market close. This company, together with its subsidiaries, develops, operates, and franchises casual dining restaurants in the U.S., Puerto Rico, Guam, and internationally. Wall Street analysts, on average, expect Ruby Tuesday to report revenue of $339.03 million on earnings of 16 cents per share.

A Raymond James analyst recently upgraded this stock ahead of its quarter, citing cost-reduction efforts and improving comp outlook. The firm slapped a $10 price target on the stock. Shares of Ruby Tuesday are off to a strong start in 2012 with the stock up over 30 percent so far.

The current short interest as a percentage of the float for Ruby Tuesday is rather high at 8.1 percent. That means that out of the 53.74 million shares in the tradable float, 4.78 million are sold short by the bears. The bears have also been increasing the bets from the last reporting period by 3.3 percent, or by about 151,000 shares. If the bears are caught pressing their bets into this quarter, then we could easily see a large spike higher post-earnings.

From a technical perspective, Ruby Tuesday is currently trading above both its 50-day and 200-day moving averages, which is bullish. This stock has been uptrending strong for the past few months and change, rising from a recent low of $6.42 to its current price of $9.06 a share. That move has now pushed Ruby Tuesday within range of triggering a big breakout trade post-earnings.

If you’re bullish on Ruby Tuesday, I would look for long-biased trades after its report if this stock manages to break out above some near-term overhead resistance at $9.39 a share with high-volume. Look for volume on that move that registers near or well above its three-month average action of 452,844 shares. If we get that move, then look for Ruby Tuesday to trend up towards $11.33 to $12 a share if the bulls gain full control of this stock post-earnings.

I would simply avoid Ruby Tuesday or look for short-biased trades if the stock fails to trigger that breakout and then drops back below some near-term support at $8.75 a share with high-volume. If we get that action, look for Ruby Tuesday to drop back below both its 50-day moving average of $8.04 and its 200-day of $8.07 post-earnings.

1. Schnitzer Steel Industries

Another earnings short-squeeze candidate is Schnitzer Steel Industries, which is set to release numbers on Thursday before the market opens. This company is a recycler of ferrous and nonferrous scrap metal. Wall Street analysts, on average, expect Schnitzer Steel Industries to report revenue of $852.37 million on earnings of 33 cents per share.

If you’re looking for a beaten-down stock heading into its quarterly report, then make sure to check out shares of Schnitzer Steel Industries. In just the past month and change, this stock has dropped from $47.45 to its current price of $39.17 a share. That move has pushed Schnitzer Steel Industries into oversold territory since its relative strength index is now 32.

During its last quarter, profit that dropped 60.6 percent to $7 million from $17.8 million the year earlier. Revenue jumped 20.3 percent to $812.2 million from $675.1 million. The company has reported year-over-year percentage revenge growth over the last four quarters. Over that timeframe, it has averaged growth of 39.2 percent. That said, last quarter the company broke a streak of earnings increases.

The current short interest as a percentage of the float for Schnitzer Steel Industries is decent at 7 percent. That means that out of the 24.84 million shares in the tradable float, 1.57 million shares are sold short by the bears. This is a notable short interest on a stock with a relatively low tradable float. Any bullish earnings news and forward guidance could easily spark a solid short-covering rally.

From a technical perspective, Schnitzer Steel Industries is currently trading above both its 50-day and 200-day moving averages, which is bullish. This stock has seen buying interest during the last few months at around $22.30 to $23.40 a share.

If you’re bullish on Schnitzer Steel Industries, I would wait until after it reports earnings and only look for long-biased trades as long as it does not break below some prior support at $38 a share. If that $38-level holds, then look for long trades especially if Schnitzer Steel Industries can trade back above $41 with volume. Look for volume on that move that’s near or well above its three-month average action of 299,902 shares. If we get that action, look for Schnitzer Steel Industries to make an attempt to re-test its 50-day moving average of $43.28 a share or possibly trend a bit higher.

I would simply avoid Schnitzer Steel Industries or look for short-biased trades if this stock takes out that major support zone at $38 a share with heavy volume. Target a drop back towards its October low of $32.79 a share or possibly lower if the bears spark a major selloff post-earnings.

Additional News: SanDisk Weakness May Signal Troubled Earnings Season

Additional Views: Pier 1 Imports: $19 Price Target: Analyst

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