It's earnings season -- an opportunity to cash in on mispriced trades and earnings surprises. Of course, the greatest challenge is finding names that will outperform.
One of the clearest sentiment indicators comes from short-sellers. Changes in the number of shares shorted over time can give a clue as to whether investors are becoming more or less pessimistic about a company.
Shorting a share involves borrowing the share and immediately selling it with the agreement to buy it back and return it in the future. This is profitable if the share price drops, so short selling indicates a bearish (or pessimistic) view on the stock's prospects.
Therefore when a stock sees fewer shares shorted over time, it indicates greater optimism from investors.
We ran a screen with this in mind, screening stocks reporting earnings next week (April 16-20) for those seeing significant decreases in shares shorted month over month.
Business section: Investing ideas
Below are the results of this screen. These stocks have seen increasing bullishness from short-sellers month over month.
Do you think these names will report earnings to the upside? (Click here to access free, interactive tools to analyze these ideas.)
1. United Continental Holdings
2. First Republic Bank: Provides private banking, private business banking, investment management, brokerage, trust services, and real estate lending services in California, Nevada, and New York. Earnings date: April 18. Shares shorted have decreased from 2.52 million to 807,350 over the last month, a decrease which represents about 2.81% of the company's float of 60.86 million shares.
4. Alliance Data Systems
6. Cytec Industries
Interactive Chart: Press Play to compare changes in analyst ratings over the last two years for the stocks mentioned above. Analyst ratings sourced from Zacks Investment Research.