5 Short Squeeze Plays for Earnings Season

by Johnson Research Group | October 15, 2012 8:47 am

Short interest for the last half of October was reported last week, and it appears to have dropped a little, which shouldn’t be a surprise. The latest data settled on Sept. 28, just after the S&P 500 index had declined 2% from its September highs. Looking at the S&P 500 stocks, short interest also had a mild drop of about 2%.

On the stock-by-stock level, a growing number of candidates look like potential short squeeze rallies. Typically, during a pullback we look for short squeezes to still have a positive impact on select stocks, especially if there’s a potential trigger within the short-term outlook, say, like …  earnings.

That’s right, nothing can make a short seller more nervous than a potential bullish trigger such as earnings. The table below lists 20 companies with compelling short interest activity ahead of their approaching earnings announcement. The idea, of course, is that the earnings release may be the trigger for a pending squeeze higher.

Johnson short squeeze list 10 15 5 Short Squeeze Plays for Earnings Season[1]

We applied some additional filtering to this list to identify companies that have been in the habit of beating analyst’s earnings expectations over the last year. The reason is simple: There’s a better chance that the shorts will squeeze prices higher if the companies maintain their trend of earnings beats.

Here are five companies that the shorts should be afraid of over the next 10 days:

First on the list, CNO Financial Group (NYSE:CNO[2]) – This insurance company engages in the marketing and administration of insurance products for senior and middle-income markets in the U.S. It has met or bested earnings expectations each of the four last quarters, and the insurance business has been strong lately With a short interest ratio over 10, another positive earnings announcement on Oct. 22 would shoot the stock above $10.

Zions Bancorp (NASDAQ:ZION[3]) — Regional banks have been hot, including ZION. Its earnings have been mixed over the last year, but the past two quarters have seen an improving trend. We think the strength in regional banks favors ZION ahead of its announcement on Oct. 22, with a short interest ratio just above 6.1. Look for an in-line or beat of the analyst’s expectations to drive the stock above $23 in short order.

Arch Coal (NYSE:ACI[4]) — Coal and natural gas companies are in play again as the election draws attention to America’s quest for energy independence[5]. Short sellers have been building positions in ACI as earnings approaches, and why not? Three of the last four reports have fallen short of analyst expectations by an average of 55%.

But there’s a catch: Last quarter, ACI beat analyst’s number by 44%, and business appears to have been picking up. This stock has been outpacing the market since August, and an earnings beat will pump prices higher. Look for the slightest positive earnings news on Oct. 22 to set ACI on a course toward $24.

Monster Worldwide (NYSE:MWW[6]) — Payroll and professional-placement companies are beginning to grab some attention as the employment market appears to be on the mend. The numbers back this up: MWW has been able to meet or beat earnings projections three of the last four quarters. Short sellers aren’t planning on it this quarter, though, as the current short interest ratio stands above 7. The stock has been basing out at $7.50 lately and appears to be ready for a charge. Expect any positive earnings news to push prices toward $9 over the next few months.

We still like housing-related stocks, which is why USG (NYSE:USG[7]) has our eye headed into its Oct. 18 earnings announcement. The company has had a rocky earnings year, beating expectations only twice, but we’re expecting the outlook to show improvements that the shorts aren’t counting on. The current short interest ratio of 8.2 is enough to initiate higher prices, especially since the stock has remained technically strong during the recent pullback.

Endnotes:
  1. [Image]: http://investorplace.com/wp-content/uploads/2012/10/Johnson-short-squeeze-list-10-15.png
  2. CNO: http://studio-5.financialcontent.com/investplace/quote?Symbol=CNO
  3. ZION: http://studio-5.financialcontent.com/investplace/quote?Symbol=ZION
  4. ACI: http://studio-5.financialcontent.com/investplace/quote?Symbol=ACI
  5. America’s quest for energy independence: http://investorplace.com/hot-topics/energy-independence/
  6. MWW: http://studio-5.financialcontent.com/investplace/quote?Symbol=MWW
  7. USG: http://studio-5.financialcontent.com/investplace/quote?Symbol=USG

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