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 (NYSE: UAL ) : Engages in the provision of passenger and cargo air transportation services. Earnings date: April 16. Shares shorted have decreased from 38.06 million to 33.46 million over the last month, a decrease which represents about 1.39% of the company's float of 330.94 million shares.
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.
3. Textron (NYSE: TXT ) : Operates in the aircraft, defense, automobile, industrial, and finance businesses worldwide. Earnings date: April 18. Shares shorted have decreased from 16.56 million to 13.23 million over the last month, a decrease which represents about 1.19% of the company's float of 279 million shares.
4. Alliance Data Systems (NYSE: ADS ) : Provides data-driven and transaction-based marketing, and customer loyalty solutions primarily in the United States and Canada. Earnings date: April 19. Shares shorted have decreased from 10.40 million to 9.04 million over the last month, a decrease which represents about 2.81% of the company's float of 48.43 million shares.
5. EMC (NYSE: EMC ) : Develops, delivers, and supports the information and virtual infrastructure technologies and solutions. Earnings date: April 19. Shares shorted have decreased from 100.41 million to 51.42 million over the last month, a decrease which represents about 2.39% of the company's float of 2.05 billion shares.
6. Cytec Industries (NYSE: CYT ) : Engages in developing, manufacturing, and selling chemical products worldwide. Earnings date: April 19. Shares shorted have decreased from 2.56 million to 2.12 million over the last month, a decrease which represents about 1.08% of the company's float of 40.66 million shares.
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.
More Expert Advice from The Motley Fool
The Motley Fool's chief investment officer has selected his No. 1 stock for the next year. Find out which stock in our brand-new free report: "The Motley Fool's Top Stock for 2013
." I invite you to take a copy, free for a limited time. Just click here
to access the report and find out the name of this under-the-radar company.