I have identified five companies that, following their next earnings report, could ignite significant short covering, leading to dramatic gains in a relatively short time frame.
1. Skullcandy (NASDAQ:SKUL)
Short Interest: 72.75% of float
Next Earnings Release: Expected in week of August 22, 2012
Reasoning: Despite the monstrous short interest, the company has managed to surprise to the upside in each quarter they reported in FY2011. In the first quarter of FY2012, they reported earnings at the top of the analyst estimate range. Further, the company just affirmed their FY2012 guidance of $280M to $300M in sales and EPS in the range of $1.17 - $1.20. Analyst estimates are in line with the company's forecast at $297M revenue and $1.17 EPS.
Further bolstering confidence is the fact that insiders have recently been buying up shares. Remember: insiders will sell for a variety of reasons, but they'll only buy for one -- to make money.
To learn more about the company and the short squeeze potential, I suggest the following two excellent articles: "Skullcandy: A Short Seller's Nightmare" by Tom Payne and "Skullcandy: The Facts Behind The Fad And The Inevitable Squeeze"
For information on the short thesis, I recommend: "Why Skullcandy Will Be A Sour Long Term Investment" by New Century.
2. Sodastream International (NASDAQ:SODA)
Short Interest: 59.04%
Next Earnings Release: Expected in week of August 13, 2012
Reasoning: Even with the gargantuan short interest against this stock, the company has managed to surprise to the upside in the six most recent earnings reports. The company is expanding aggressively both in the US and internationally. Quarterly earnings growth year-over-year for the most recent quarter came in at 79.3%. Further, the company has a strong cash position of $51.97M and a small debt of 3.19M.
Articles I found particularly helpful in support of the long side were "SodaStream To Hit Grocery Stores In 2014", and "Coke Steps Up For A Fight, And SodaStream's Not Backing Down".
For a more bearish view, I recommend "SodaStream Loses Its Competitive Edge" by Brian Schmeer.
3. Gamestop (NYSE:GME)
Short Interest: 42.14% of float
Next Earnings Release: Expected the week of August 13, 2012
Reasoning: It's clear that in terms of PC gaming, digital distribution has clearly taken over. Online services such as Valve Corporation's "Steam", Electronic Arts' (NASDAQ:EA) "Origin", and even GameStop's own "Impulse" have made boxed copies a relic.
However, I believe that GameStop's increasing shift towards digital distribution, along with its strong cash position of $329M (and no debt) will allow the company to see moderate growth going forward. Further, I don't think that digital distribution will cut significantly into the console game sales, which, for mainstream titles, outsell their PC counterparts and still come on physical media. In addition, people will still want to buy used games at a discount, and GameStop will still be happy to supply that demand.
4. Advanced Micro Devices (NASDAQ:AMD)
Short Interest: 12.46% of float
Next Earnings Release: July 19, 2012
Reasoning: Despite the apparent pessimism that has taken AMD's stock down significantly from its $8+ highs earlier this year, AMD has managed to surprise to the upside of analyst estimates in the last three earnings calls. I believe the pessimism towards the PC industry in general is overblown, and I further believe that AMD has significant room to grow its market share in all key segments of its core x86 markets.
Analysts are modeling 0.12 - 0.18 cents per share this quarter with a mean of 0.14 cents per share.
For more bearish arguments, I recommend "Does AMD Recovery Have Legs" by Dana Blankenhorn and "Advanced Micro Devices: Why You Should Avoid It At Current Price Levels" by Alex Shadunsky.
5. OCZ Technology Group (NASDAQ:OCZ)
Short Interest: 38% of float
Next Earnings Release: July 10, 2012
Reasoning: With a high short interest despite growing gross margins, an increasing presence in both the consumer and enterprise SSD market, and strong FY2013 revenue guidance, this stock is perfect for a short squeeze if the earnings report is favorable. However, the company significantly disappointed at the last earnings call, citing significantly increased operating expenses. The increase is necessary to continue to expand the business, however, and I believe that the company will do well.
The key things to watch for (both bears and bulls) are:
1. Increasing gross margins
2. Stabilization of operating expenses
3. Q1 sales and Q2 guidance that make their FY2013 target of $630-700M (against FY2012's $365M) seem plausible.
4. Profit guidance on a non-GAAP basis for Fiscal Q2 2013, as noted in the most recent earnings call.
Some useful resources that dig deeper into the financial details and prospects can be found in the excellent articles "Key On The Gross Margin Improvements At OCZ Technology" by Stone Fox Capital, and "OCZ Technology Update: Boosting Estimates" by Stan Piland. For a more general overview of the long thesis, I suggest my own "OCZ Technology Group Seems Extremely Undervalued"
Additional disclosure: I may initiate a long position in SODA over the next 72 hours.