Rates from Bankrate.com

  • Mortgage
  • Credit Cards
  • Auto

5 Short-Squeeze Plays for Profit

Tickers in this article: FRAN LULU FNSR TITN BRLI
WINDERMERE, Fla. ( 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.

>>5 Stocks Warren Buffett Loves

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 The 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.

>>5 Toxic Stocks to Dump Before 2013

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

Francesca's

My first earnings short-squeeze play is Francesca's (FRAN) , which is set to release numbers on Wednesday before the market open. This company operates a chain of retail boutiques in the U.S. The company's retail boutiques offer apparel, jewelry, accessories, and gifts to female customers. Wall Street analysts, on average, expect Francesca's to report revenue of $71.24 million on earnings of 22 cents per share.

# http://business-news.thestreet.com/the-news-herald is currently incorrect and needs to be changed # new code for http://business-news.thestreet.com/the-news-herald :: # The News-Herald (serving northern ohio) # home links to http://www.news-herald.com/