AdvisorOne’s Best Comments: Goldfarb, Fiduciary, Referrals

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But the best comments can help continue the conversation of any story or blog for our readers—and for us—beyond the article’s own words.  So AdvisorOne will be regularly highlighting some of the better comments that are posted to keep the conversation alive. The comments weren’t highlighted because they were long or short, just, hopefully, thought-provoking.

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1. The Curious Case of Alan Goldfarb, and Why All Advisors Should Care: Investment Advisor Editor-at-Large Bob Clark wrote his weekly blog on June 12 off an interview with Alan Goldfarb, the former CFP Board chair who was asked to resign last year.

Comment by Ron Rhoades

Submitted on 6/12/2013 at 17:48

Bob, an excellent article on a confusing case. Due to the confidentiality of CFP Board disciplinary proceedings, we are never likely to obtain a full knowledge of the facts, even in summary form, as they were presented at the CFP Board hearing. Accepting Alan Goldfarb's statements as both true and complete (which I do, for he has long been a man of honor and a leader of the profession), I remain perplexed about two aspects of the CFP Board's ruling to (1) find that a violation occurred; and (2) impose the draconian penalty of a public sanction.

FIRST, there does not appear to be any explanation of the term "salary" on the CFP Board's web site. I receive a salary from my fee-only investment advisory firm; can I use the term "salary"? Or, since all compensation DERIVES from either fee compensation (i.e., paid directly by the client) or commission-based compensation, should all advisors describe themselves as either "fee-only" or "fee-and-commission" or "commission-and-fee" or "commission-only" on the CFP Board's web site? In other words, who - if anyone - is permitted to utilize the term "salary"? Given such, is the misunderstanding that occurred not the fault of Mr. Goldfarb, but rather the fault of the CFP Board? And ... would not others have been caught in the trap of this ambiguity - and what happened to their cases?

SECOND, why a public sanction for such the alleged seemingly minor transgression - if it was a transgression at all? It seems that other disclosures provided by Alan Goldfarb and his firm corrected any misunderstanding any client or potential client would possess - if indeed there was any violation at all, and if indeed any client or potential client was confused by the language found on the CFP Board's web site. Alan Goldfarb was apparently thorough and prompt in his reply to the CFP Board. Moreover, Alan Goldfarb very publicly resigned his CFP Board Chairmanship in order to preserve the reputation of the CFP Board while this investigation was pending. In other words, there does not appear to be any harm to Alan Goldfarb's clients, nor to the public. And Mr. Goldfarb, by his very public resignation last year, already burdened himself with public discussion of the situation. Are the CFP Board's disciplinary guidelines, as to sanctions imposed for the alleged offense, so uncompromisingly rigid that a public sanction was warranted (even assuming, again, that a transgression of the CFP Board's rules even occurred)? You characterize the case as "curious." I would go further, and say that the CFP Board's decision in this matter poses a grave concern.

At the minimum, and without reference to any particular case before it (now or in the past), the CFP Board should adequately and prominently define for its Certificants the term "salary" and specify the circumstances in which it can be utilized (and when it cannot). Even then, any retrospective application of such an explanation appears unjust and a denial of due process - not only for Alan Goldfarb, but also for any other persons trapped by the ambiguity which has been so created by the CFP Board.

2. The Curious Case of Alan Goldfarb, and Why All Advisors Should Care

Comment by Anonymous (Mary Malgoire)

Submitted on 6/14/2013 at 17:41

Bob, your old pal Mary Malgoire here. Excellent article... I would like to clarify one thing about NAPFA's standards for admission. We recognize that some fee-only advisors are indeed salaried professionals in a stand-alone business unit that is owned by a commission-based firm. Since there could be expectations, even incentives, to refer business to the "product side" of the house. NAPFA requires a signed statement from the salaried individual's supervisor that said professional has NO obligation to recommend the subsidiaries products and may recommend ANY product that is suitable for the client. In some situations the applicant's supervisor refuses to sign such a statement. That tells you something!

So my quesiton here is whether or not Mr. Goldfarb was under any obligation to satisfy client product needs via the firm's subsidiaries? The ADV Part 2 also helps NAPFA to understand and can enlighten. I too hope the CFP Board and other professional associations will clarify these issues as my own investigation indicates that there are many professionals associated with commission and fee firms who claim "fee-only" on "find a planner' searches. If the firm's website lists a broker-dealer affiliation, it is a misrepresentation to the public to list yourself as fee-only? My solution to all of this, as I said at the Fiduciary Summit yesterday, is to simply require dislcosure of the adviser's (and advisory firm's) actual $ financial interest and let the marketplace work it's magic.

3. Will Indexing Kill the Market?: In his May column for Research magazine, published on AdvisorOne on April 29, 2013, Marshall Jaffe wrote: “Yet hidden in the shadows of indexing’s monumental success is a growing body of evidence that this truly elegant idea not only has the potential to threaten the stability of the market, but has already changed market behavior in ways few if any investors understand.”

Comment by Anonymous (James McRitchie)

Submitted on 6/13/2013 at 16:22

The larger problem with indexed funds is that they have little if any incentive to actually monitor management since they compete with other indexed funds on the basis of low fees. Any benefit that occurs because of their active monitoring goes equally to their competitors, but every dime they spend is only their own expense. We have reached the point that a majority or close to a majority of stock in most large companies is held by indexed funds. The result is that either they defer to management (which I suspect is most frequently the case) or they defer to ISS and Glass Lewis. Either way is problematic. I discuss this more thoroughly in a three part post, beginning with "Agency Capitalism: Corrective Measures (Part 1)." My post includes suggested solutions, including proxy advisor contests, which will allow much more time and analysis than the estimated average of $2,000 per proxy spent by ISS.

4. What a Pretzel Entrepreneur, a Navy Widow and an Ex-Rep All Need From Their Advisors Investment Advisor Editor-in-Chief John Sullivan wrote this news piece on June 14, 2013, from the TD Ameritrade Institutional Elite Advisor’s conference, reporting on a consumer panel moderated by Barbara Roper of the Consumer Federation of America. “The panel, convened to discuss consumer awareness of the concept of fiduciary, quickly deviated into other issues, as panelists agreed that acting in their best interest was important even if they never heard the term ‘fiduciary’ used in that context.”

Comment by Anonymous

Submitted on 6/14/2013 at 11:01

What was the point of the article? Has anyone asked the CFPBOS [the CFP Board of Standards] why for decades they actively fought the imposition of a fiduciary standard? If it was core to the practice then it would have been embraced at the onset.

5. 5 Tips for a Successful Referral Request: In this article by Paul McCord, originally published June 13, 2013, on AdvisorOne’s sister publication LifeHealthPro, the author wrote, “Let’s take a look at the primary problems the traditional referral 'method' creates.”

Comment by Stephen Wershing, CFP

Paul, a lot of good points. One key is understanding why people make referrals. We all engage in referral behavior all the time, and it is because we get rewards for it. Advisors do not widely understand this, and so they think we have to pry them out of clients, totally disrespecting why the client would do it and actually helping prevent future referrals. Also, as you point out, clients do not generally understand who to refer. Addressing these issues, like I do on my blog , The Client-Driven Practice,  and other places, you can get people referring -- without asking! There is also more about this in the interview I did with Investment Advisor magazine last August: How to Succeed at Referrals (Without Even Asking).

New Data on Biogen's Eloctate - Analyst Blog

Biogen Idec (BIIB) and Swedish Orphan Biovitrum AB recently presented new data on their hemophilia A candidate, Eloctate, at the XXIV International Society on Thrombosis and Haemostasis (ISTH) Congress.

Data presented by Biogen and Swedish Orphan Biovitrum supported Eloctate's safety and efficacy profile.

According to the new data, a single injection of Eloctate helped control more than 87% of bleeds while more than 97% of bleeds could be controlled by two or fewer injections. Moreover, bleeding during and after 9 major surgeries were controlled by Eloctate in 9 patients with hemophilia A.

Biogen also presented data on Eloctate from a population pharmacokinetics (popPK) model as well as an evaluation based on the usage of two investigational hemostasis assays.

We note that Biogen and Swedish Orphan Biovitrum had initially presented positive top-line results on Eloctate from the global, multi-center, phase III A-LONG study last year. About 98% of bleeding episodes were controlled with one or two injections of Eloctate. Eloctate was found to be generally well-tolerated.

Eloctate is currently under US Food and Drug Administration (FDA) review – a response regarding its approval status should be out early next year.

The company's hemophilia B candidate, Alprolix, is also under FDA review with a response expected by year end.

A convenient dosing schedule (supported by a longer duration of action and a suitable safety profile) could help Alprolix and Eloctate capture share from existing products in the hemophilia market.

Biogen currently carries a Zacks Rank #1 (Strong Buy). Avonex and Tysabri should continue contributing significantly to sales. Tecfidera should help drive long-term growth. We are also encouraged by Biogen's progress with its hemophilia candidates.

A few other companies that look equally well-positioned are Aeterna Zentaris (AEZS), Cytori Therapeutics, Inc. (CYTX) and Protalix BioTherapeutics, Inc. (PLX). All three! are Zacks Rank #1 stocks.

Edmunds: Try placing trust in your staff

Hello, Gladys, I consider myself successful in my business. I own a temporary employment agency and I haven't been on vacation in 10 years. The reason is, I can't be comfortable when I'm not in my office. It's ironic my company is very good at matching temps to employers, but I can't seem to find good people to work for me. I spend most of my day putting out fires that my staff presents me with. It's just one thing after the other. I often have to oversee or at least double-check their work. And in most cases it has to do with customer satisfaction. Do you have any suggestions? -- Jon

You seem to be micromanaging, and that can be counterproductive to business success.

Your hiring procedures should be consistent with your business visions and objectives. Before interviewing people, have you made a list of the qualities that you need in the hire? Are you asking for references to support the qualifications claimed by the applicant? Are your new hires clear on what is expected of them? Taking the time to address these things along with anything else that can be beneficial to your company is crucial.

If you find that there is nothing wrong with your people when you hire them, then we can assume that the problem starts after they have been hired. Therefore it is time to look at how your management style. I have often told the story about my father never allowing my brothers to mow the lawn when we were kids because my dad believed that my brothers could not do the good job that he could do himself. On the few times that he allowed one of my brothers to mow the grass or cut the hedges he would stand over them like a hawk and yell out instructions on how he wanted it done.

STRAUSS: Empower your employees

My husband used to micromanage the repairman that he called in to make a home repair of some sort. He would watch their every move while asking a bunch of questions and periodically throwing in a few suggestions. Never mind that he knew nothing about the repairs being! performed.

This kind of behavior can scare a person out of their wits and force them to become defensive or let you do their job. And, it can work on your nerves as well. I know how difficult it can be. Try backing off a bit and let your employees have a little responsibility of their own. Many entrepreneurs feel that if the job is to be done right they will have to do it themselves.

This belief can also find its way into other aspects of the entrepreneur's life. I volunteered to be on a fundraising committee for an organization. The chairperson was an entrepreneur. She wanted to micromanage how each of us approached our prospects for a contribution. Meanwhile she had never done charitable fundraising herself. And her constant nagging and demanding to be told step-by-step each thing we did or said was annoying.

Try letting your staff to do their own work. Make them feel like a part of your company by backing off and trusting them a little more. Those employees who actually can't handle responsibility will most likely leave on their own; otherwise you can feel comfortable in letting them go. Hold regular meetings that focus on the kind of training that is consistent with goals and/or your company mission statement. You will probably be pleasantly surprised. Employees who are made to feel like a real part of the company will take pride in their work. They will also feel free to express their ideas and suggestions that can help your company to grow.

A final point: Expect the best from your staff and let them know they are capable of performing with excellence. And you will most likely get it.

Gladys Edmunds, founder of Edmunds Travel Consultants in Pittsburgh, is an author and coach/consultant in business development. Her column appears Wednesdays. E-mail her at gladys@gladysedmunds.com. An archive of her columns is here. Her website is gladysedmunds.com.

Has Walgreen Bounced Back for Good?

Next Tuesday, Walgreen (NYSE: WAG  ) will release its latest quarterly results. Amid plenty of news pointing to the company's growth prospects, the stock recently hit all-time highs, but its gains appear to have plateaued over the past several months as investors seek further catalysts for gains.

Walgreen already has an enviably strong position within the drugstore business, and its recent strategic moves aim to broaden its appeal on a global scope. Yet, investors are still concerned about damage that a major dispute might have done to its long-term business prospects. Let's take an early look at what's been happening with Walgreen over the past quarter, and what we're likely to see in its quarterly report.

Stats on Walgreen

Analyst EPS Estimate	$0.91
Change From Year-Ago EPS	26%
Revenue Estimate	$18.44 billion
Change From Year-Ago Revenue	3.9%
Earnings Beats in Past 4 Quarters	3

Source: Yahoo! Finance.

Has Walgreen resolved all its problems?
In recent months, analysts have had narrowly mixed views about Walgreen's earnings prospects. They've cut their May-quarter estimates by $0.01 per share, but they've boosted their fiscal 2014 consensus by the same penny. The stock has made additional gains, rising about 9% since mid-March.

The ongoing long-term concern that many investors have had about Walgreen stems from its dispute last year with pharmacy benefits manager Express Scripts (NASDAQ: ESRX  ) . Following its merger with Medco Health Solutions, Express Scripts became an increasingly important source of business in the industry, and an exodus of customers from Walgreen boosted the prospects for its competitors. Indeed, long-struggling Rite Aid was able to take advantage of the situation to engineer a sharp turnaround, posting an annual profit last year for the first time in six years, and demonstrating just how extensive the damage was to Walgreen's business.

Since resolving that dispute, Walgreen has made a number of smart strategic moves to bolster growth. In March, the company entered into a 10-year agreement with drug distributor AmerisourceBergen that will fit well with its global expansion plans. Walgreen's purchase of a substantial stake in European drugstore chain Alliance Boots created the need for a more extensive distribution network, and by creating what amounts to a vertically integrated supply chain, Walgreen is setting up the infrastructure for further growth overseas.

Preliminary results show decent success with Walgreen's strategy. During April, same-store sales rose 1.2%, with larger gains of 4.7% in pharmacy sales pointing to customers returning to Walgreen's fold. May's increase in comps of 2.8% showed the same tilt toward the pharmacy side of the business. Yet, rival CVS Caremark (NYSE: CVS  ) has also given investors some positive news, guiding earnings and revenue last month to the upper end of previously provided ranges amid favorable impacts of greater generic-drug availability. Despite Walgreen's success, CVS remains a strong competitive threat, especially with its combination of pharmacy benefits management and retail drug stores.

In Walgreen's report, watch for further guidance about the path the company intends to take strategically. By identifying the role its international expansion will play, Walgreen should be able to show shareholders what will further drive share-price gains in the future.

In 2011, a massive shift began. With the first of the baby-boomer generation reaching Medicare age, America's health-care landscape was forever changed. Combine the aging population with the impact of Obamacare, and the need for innovative solutions for skyrocketing health care costs is as clear as ever. Express Scripts is part of that solution, and in this brand new premium report on the company, we clearly lay out the opportunity in front of this misunderstood stock. Claim your copy by clicking here now.

Click here to add Walgreen to My Watchlist, which can find all of our Foolish analysis on it and all your other stocks.

The Dell "Heist" Is Proceeding as Planned

U.S. stocks are flat this morning, with the S&P 500 (SNPINDEX: ^GSPC  ) and the narrower, price-weighted Dow Jones Industrial Average (DJINDICES: ^DJI  ) losing less than two points each as of 10 a.m. EDT.

The perfect crime
In a few years' time, technology executives and investors will marvel at the deal Michael Dell and Silver Lake Partners put together to take PC manufacturer Dell (NASDAQ: DELL  ) private. I can't be certain of this, of course, but I think they will end up making out like bandits. The $13.65 per share they are preparing to pay is an insolent offer, yet the acquirers, particularly Michael Dell, are absolutely brazen, which is why I refer to the deal as a "heist." Where is the board, whose duty is to protect shareholders' interests, in all this?

Unfortunately, the company filed proxy materials this morning with the SEC, according to which the board is recommending that shareholders accept the offer when it is put to a vote in July. Admittedly, the counteroffer from hedge fund manager Carl Icahn and Southeastern Asset Management has not been made fully clear; multiple board inquiries regarding the financing of their offer have gone unanswered. However, that does not mean the board is obligated to accept the first fully financed offer it receives.

Why do I write that that $13.65 per share is an insolent offer? Take a look at the 10-year Dell share price graph:

DELL data by YCharts.

Michael Dell and Silver Lake Partners picked a point at which the shares were essentially at a decade-plus low before swooping in with an offer that represents just a 37% premium to the price prior to the rumor of the deal surfacing (the shares bottomed last November at $8.86; prior to that the bottom was $8.04 on March 9, 2009, but this was the date on which the S&P 500 hit its own low). If you believe that Dell is in terminal decline, that offer is more than acceptable. If, like long-term shareholder Southeastern Asset Management (and me), you believe Dell has a solid franchise beyond just its PC business, the offer is an insult and the board is derelict in protecting the interests of shareholders not named Michael Dell.

It's incredible how much our digital and technological lives are shaped by just a handful of companies. Find out "Who Will Win the War Between the 5 Biggest Tech Stocks?" in The Motley Fool's latest free report, which details the knock-down, drag-out battle being waged by the five kings of tech. Click here to keep reading.

Capital Southwest to Change CEOs in June

Dallas-based Capital Southwest Corp. (NASDAQ: CSWC  ) will have a new CEO soon. The asset manager and venture capitalist says Chairman, President, and Chief Executive Officer Gary L. Martin will resign effective June 17 and be replaced by new President and CEO Joseph B. Armes, who currently serves as CEO of family investment vehicle JBA Investment Partners.

Martin joined Capital Southwest in 1972 as chief financial officer.

In a filing with the SEC, Capital Southwest disclosed that it will be paying Armes an annual base salary of $430,000, plus:

An annual cash bonus of up to 150% of base salary. 7,500 stock options vesting over five years. 1,250 shares of restricted stock. 6,000 "phantom stock options," which allow Armes to benefit from an appreciation in Capital Southwest's stock price (if it happens) as if he had exercised stock options and sold stock for a profit -- but do not require him to go through with the actual mechanics of such exercise and sale.

link

1 Potential Roadblock for the Pfizer Stock Run-up

Investors holding Pfizer (NYSE: PFE  ) stock are sitting pretty these days. Since they say that a picture is worth a thousand words, I'll let this picture explain why.

PFE data by YCharts.

Pfizer is walloping the S&P 500, which isn't doing too badly itself. But all good things must come to an end, right? Let's look at the one thing most likely to put a halt to this stock's terrific run of late.

Checking off the list
This should be a piece of cake. Nearly all of the big pharma companies continue to face problems due to the patent cliff. Surely an expiring patent could soon derail the Pfizer stock run, right? Actually, no.

It's true that Pfizer's revenue took a substantial hit from Lipitor going off patent. However, the company doesn't face any significant drugs losing patent protection this year. The U.S. patent for arthritis drug Celebrex expires in 2014, but that's still a ways off. 

Drug company stocks often get zapped by bad results from a late-stage trial. Is there a study coming up that could dent Pfizer stock? Judging from the Food and Drug Administration's calendar for the rest of the year, that answer is "no."

Shares of Johnson & Johnson (NYSE: JNJ  ) and Merck (NYSE: MRK  ) have also moved up quickly. J&J's price-to-earnings multiple is at its highest point since 2006. Merck's P/E is higher than it's been since the beginning of 2012. These higher valuations could lead to profit-taking and bring down shares. Is Pfizer also at risk? Not really.

Although Pfizer's P/E has been on the move upward, it's still actually close to its lowest levels since late 2011. And it's well below the trailing P/E values for both J&J and Merck.

Of course, that begs the question: Is there something wrong with Pfizer's stock if it's not doing as well as these peers? We have to remember that J&J isn't just a pharmaceutical company; it's also a consumer products and medical device company. Actually, its medical device business has been thriving more than any segment lately.

Merck is more akin to Pfizer. The two companies' P/E multiples tracked pretty well until this year. What happened?

Nothing to worry about. Pfizer's sale of its nutrition business generated extra earnings that brought its trailing P/E down. This doesn't undermine the argument that Pfizer is trading cheaply, though. Its forward P/E is still attractive.

Pfizer has caught some heat recently from Congress over its pricing for rheumatoid arthritis drug Xeljanz, which was developed in collaboration with the National Institutes for Health. However, I don't expect this issue to derail the stock.

Perhaps sales for newer products such as Xeljanz could prove disappointing. Again, I don't think this will be the case. Xeljanz should live up to expectations.

So should Eliquis, the blood-thinning drug developed with partner Bristol-Myers Squibb (NYSE: BMY  ) . Pfizer and Bristol received FDA approval for the drug in December.Some analysts project that Eliquis could generate annual sales of $3 billion to $5 billion. Those numbers are music to the ears of both Pfizer and Bristol.

This has turned into more of a challenge than initially appeared. What can stop Pfizer's momentum?

The one thing
Of course, plenty of wild cards could cause Pfizer stock to drop. Unexpected product safety issues or controversies could rear up. However, the most likely roadblock ahead for the big drugmaker is one that it can't control: the economy.

Current world tensions could escalate into something serious. Unemployment could head in a negative direction. A wide variety of issues could come up that cause overall markets to fall, bringing Pfizer stock down with them.

The possibility of such macroeconomic problems appears to be the one thing most likely to get in the way of the current Pfizer stock steamroller. However, fear of what could happen can result in missing out on good things that are happening. And right now, Pfizer has a lot of good things going on.

The best investing approach is to choose great companies like Pfizer and stick with them for the long term. The Motley Fool's free report "3 Stocks That Will Help You Retire Rich" names stocks that could help you build long-term wealth and retire well, along with some winning wealth-building strategies that every investor should be aware of. Click here now to keep reading.

Why Zumiez Shares Popped

Although we don't believe in timing the market or panicking over market movements, we do like to keep an eye on big changes -- just in case they're material to our investing thesis.

What: Shares of sports-apparel retailer Zumiez (NASDAQ: ZUMZ  ) jumped as much as 16% today after reporting better-than-expected same-store sales.

So what: The skateboard-and-snowboard specialist said that comparable sales increased 2.1%, while analysts had expected a drop of 7.5%. Total company sales for the five-week period ending April 6 increased 20%. The action sport retailer said both higher prices and greater unit sales helped drive the same-store sales improvement.  

Now what: Zumiez was one of a number of retailers to post better-than-expected same-store sales, helping to drive the broader market higher. One month's results do not make for a particularly strong investing thesis, and the company seems to have benefited from low expectations.  March is also a generally slow month for the retailer, which makes most of sales in the second half of the year, but expect analysts to raise their estimates for the quarter. Currently, the consensus is just $0.10 a share.

Stay up to date on Zumiez. Add the company to your Watchlist by clicking right here.

Urban Outfitters pulls offensive sweatshirt

Urban Outfitters has removed the Kent State sweatshirt from its website. NEW YORK (CNNMoney) After coming under fire on social media, Urban Outfitters has apologized for selling a "vintage" Kent State sweatshirt that many found highly offensive.

The $129 sweatshirt has been removed from Urban Outfitters (URBN)' website. But images of the sweatshirt, which has red spots on it that critics say resemble blood stains, have been widely circulated online.

The edgy youth store issued a statement saying "it was never our intention to allude to the tragic events that took place at Kent State in 1970."

On May 4, 1970, four students were killed and nine others were injured at Kent State University in Ohio after National Guard soldiers opened fire on protesters demonstrating against the Vietnam War.

Kent State University issued a statement denouncing Urban Outfitters for "using our pain for their publicity and profit."

"This item is beyond poor taste and trivializes a loss of life that still hurts the Kent State community today," the statement reads.

The sweatshirt was panned on Twitter (TWTR, Tech30)as "tasteless," "tacky" and "awful."

The "one-of-a-kind" sweatshirt was sold as part of Urban Outfitters' "sun-faded vintage collection" and was not altered in any way, according to the statement. There is no blood on the garment and Urban Outfitters said the red stains are due to "discoloration," while holes in the sweatshirt are due to "natural wear and fray."

Now, the sweatshirt is for sale on eBay (EBAY, Tech30). The seller is asking $2,500 for the "infamous one of a kind Kent State Sweater." The starting bid was $550 for the sweater, which the seller says is "perfect for Halloween or whatever your deal is."

The seller promised to donate half of the proceeds to The Southern Poverty Law Center.

This is not the first time Urban Outfitters, which caters to young consumers who want to seem "hip," has offended the wider public.

Urban Outfitters (URBN) has previously come under fire for selling woman's T-Shirts with "Eat Less" and "Depression" printed on it. The Philadelphia-based retailer has also been criticized for a shirt that evoked the stars that Jews were forced to wear during the Holocaust.

5 Stocks Set to Soar on Bullish Earnings

DELAFIELD, Wis. (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 Under $10 Poised to Pop in June

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.

>>Buy These 5 Rocket Stocks to Beat the Market

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.

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

Bed Bath & Beyond

My first earnings short-squeeze play is home furnishing retail stores operator Bed Bath & Beyond (BBBY), which is set to release numbers on Wednesday after the market close. Wall Street analysts, on average, expect Bed Bath & Beyond to report revenue of $2.69 billion on earnings of 95 cents per share. Just today, UBS decreased its price target on Bed Bath & Beyond to $65 and slapped a neutral rating on the stock.

>>3 Big-Volume Stocks to Trade for Breakouts

The current short interest as a percentage of the float for Bed Bath & Beyond is notable at 4.9%. That means that out of the 195.31 million shares in the tradable float, 9.57 million shares are sold short by the bears. The bears have also been increasing their bets from the last reporting period by 24.6%, or by about 1.88 million shares. If the bears get caught pressing their bets into a bullish quarter, then shares of BBBY could easily rip sharply higher post-earnings as the bears rush to cover some of their trades.

From a technical perspective, BBBY is currently trending below both its 50-day and 200-day moving averages, which is bearish. This stock has recently formed a triple bottom chart pattern at $60.55, $60.29 and $59.89 a share. Shares of BBBY are now starting to spike modestly higher off those support levels and it's quickly moving within range of triggering a big breakout trade post-earnings.

If you're bullish on BBBY, then I would wait until after its report and look for long-biased trades if this stock manages to break out above some near-term overhead resistance levels at $61.67 to $63.03 a share with high volume. Look for volume on that move that hits near or above its three-month average volume of 2.76 million shares. If that breakout hits post-earnings, then BBBY will set up to re-test or possibly take out its next major overhead resistance level at $65.14 a share. Any high-volume move above that level will then give BBBY a chance to re-fill some of its previous gap-down-day zone from April that started above $68 a share.

I would simply avoid BBBY or look for short-biased trades if after earnings it fails to trigger that breakout and then drops back below its 52-week low of $59.89 a share high volume. If we get that move, then BBBY will set up to re-test or possibly take out its next major support levels at $55 to $54, or even $53 a share.

KB Home

Another potential earnings short-squeeze trade idea is homebuilding player KB Home (KBH), which is set to release its numbers on Friday before the market open. Wall Street analysts, on average, expect KB Home to report revenue $563.10 million on earnings of 20 cents per share.

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Recently, RBC Capital predicted that KB Home's second quarter EPS and homebuilding revenue should surpass consensus estimates. The firm thinks the company can benefit from strong volumes, gross margin expansion and solid price increases. RBC maintained an outperform rating on the stock.

The current short interest as a percentage of the float for KB Home is extremely high at 24%. That means that out of the 67.75 million shares in the tradable float, 16.85 shares are sold short by the bears. This is a stock with a big short interest and a relatively low tradable float. Any bullish earnings news could easily spark a large short-squeeze post-earnings that forces the bears to cover some of their positions.

From a technical perspective, KBH is currently trending above both its 50-day and 200-day moving averages, which is bullish. This stock has been uptrending over the last month and change, with shares moving higher from its low of $15.40 to its intraday high of $18.03 a share. During that uptrend, shares of KBH have been consistently making higher lows and higher highs, which is bullish technical price action. That move has now started to push shares of KBH within range of triggering a big breakout trade post-earnings.

If you're in the bull camp on KBH, then I would wait until after its report and look for long-biased trades if this stock manages to break out above some near-term overhead resistance levels at $19.41 to its 52-week high of $20.78 a share with high volume. Look for volume on that move that hits near or above its three-month average action of 3.85 million shares. If that breakout kicks off post-earnings, then KBH will set up to enter new 52-week-high territory, which is bullish technical price action. Some possible upside targets off that breakout are $25 to $30 a share.

I would simply avoid KBH or look for short-biased trades if after earnings it fails to trigger that breakout and then drops back below both its 200-day moving average of $17.38 a share and its 50-day moving average of $16.55 a share with high volume. If we get that move, then KBH will set up to re-test or possibly take out its next major support level at its 52-week low of $15.40 a share.

Finish Line

Another potential earnings short-squeeze candidate is specialty retailer of athletic shoes, apparel and accessories Finish Line (FINL), which is set to release numbers on Friday before the market open. Wall Street analysts, on average, expect Finish Line to report revenue of $394.17 million on earnings of 21 cents per share.

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Recently, Canaccord predicted that first-quarter results for Finish Line should be in-line with expectations. The firm continues to see solid momentum coupled with improved execution and easy second-quarter comps. Canaccord has a buy rating on shares of FINL with a $32-per-share price target.

The current short interest as a percentage of the float for Finish Line is notable at 6.8%. That means that out of the 47.11 million shares in the tradable float, 3.21 million shares are sold short by the bears. If the bulls get the earnings news they're looking for, then shares of FINL could easily soar sharply higher post-earnings as the bears jump to cover some of their trades.

From a technical perspective, FINL is currently trending above both its 50-day and 200-day moving averages, which is bullish. This stock has been uptrending strong over the last five months, with shares moving higher from its low of $22.86 to its recent high of $30.48 a share. During that uptrend, shares of FINL have been consistently making higher lows and higher highs, which is bullish technical price action. That move has now pushed shares of FINL within range of triggering a big breakout trade post-earnings.

If you're bullish on FINL, then I would wait until after its report and look for long-biased trades if this stock manages to break out above some near-term overhead resistance at $30.42 a share to its 52-week high at $30.48 a share (or above Thursday's intraday high if greater) with high volume. Look for volume on that move that hits near or above its three-month average action of 660,530 shares. If that breakout materializes post-earnings, then FINL will set up to enter new 52-week-high territory, which is bullish technical price action. Some possible upside targets off that breakout are $35 to $40 a share.

I would avoid FINL or look for short-biased trades if after earnings it fails to trigger that breakout and then drops back below 50-day moving average of $28.51 a share with high volume. If we get that move, then FINL will set up to re-test or possibly take out its next major support levels at its 200-day moving average of $26.31 to $25 a share.

AZZ

Another earnings short-squeeze prospect is electrical equipment maker and engineered services provider AZZ (AZZ), which is set to release numbers on Friday before the market open. Wall Street analysts, on average, expect AZZ to report revenue of $191.37 million on earnings of 54 cents per share.

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The current short interest as a percentage of the float for AZZ is notable at 5.7%. That means that out of the 24.76 million shares in the tradable float, 1.43 million shares are sold short by the bears. If this company can deliver the earnings news the bulls are looking for, then shares of AZZ could easily spike sharply higher post-earnings as the bears move to cover some of their trades.

From a technical perspective, AZZ is currently trending above both its 50-day and 200-day moving averages, which is bullish. This stock has been trending sideways and consolidating for the last three months, with shares moving between $41.37 on the downside and $46.67 on the upside. Shares of AZZ are now starting to spike higher right off both its 50-day and 200-day moving averages and that move is starting to push shares of AZZ within range of triggering a big breakout trade above the upper-end of its recent sideways trading chart pattern.

If you're bullish on AZZ, then I would wait until after its report and look for long-biased trades if this stock manages to break out above some near-term overhead resistance levels at $46.04 to $46.67 a share with strong volume. Look for volume on that move that hits near or above its three-month average action of 100,958 shares. If that breakout triggers post-earnings, then AZZ will set up to re-test or possibly take out its 52-week high at $49.64 a share. Any high-volume move above that level will then give AZZ a chance to trend north of $50 a share.

I would simply avoid AZZ or look for short-biased trades if after earnings it fails to trigger that breakout and then drops back below some key near-term support levels at $43.55 to $43.12 a share with high volume. If we get that move, then AZZ will set up to re-test or possibly take out its next major support levels at $42 to $41 a share, or even $40 a share.

Lennar

My final earnings short-squeeze play is homebuilding player Lennar (LEN), which is set to release numbers on Thursday before the market open. Wall Street analysts, on average, expect Lennar to report revenue of $1.68 billion on earnings of 51 cents per share.

Just this morning, Cleveland Research said Lennar has modest risk to new-home volumes but that that will largely be offset with margin progress and share gains. Cleveland Research thinks Lennar is positioned to outperform.

The current short interest as a percentage of the float for Lennar is very high at 14.4%. That means that out of the 178.19 million shares in the tradable float, 25.73 million shares are sold short by the bears. If Lennar can deliver the earnings news the bulls are looking for, then shares of LEN could easily surge sharply higher post-earnings as the shorts jump to cover some of their bets.

From a technical perspective, LEN is currently trending above both its 50-day and 200-day moving averages, which is bullish. This stock is starting to spike higher right above its 50-day moving average of $39.69 a share. That move is beginning to push shares of LEN within range of triggering a major breakout trade post-earnings above some key overhead resistance levels.

If you're in the bull camp on LEN, then I would wait until after its report and look for long-biased trades if this stock manages to break out above some near-term overhead resistance levels at $42.28 to $42.68 a share and then once it clears its 52-week high of $44.40 a share with high volume. Look for volume on that move that hits near or above its three-month average volume of 3.15 million shares. If that breakout gets underway post-earnings, then LEN will set up to enter new 52-week-high territory above $44.40 a share, which is bullish technical price action. Some possible upside targets off that breakout are $50 to $55, or even $60 a share.

I would avoid LEN or look for short-biased trades if after earnings it fails to trigger that breakout, and then drops back below its 50-day moving average of $39.69 a share with high volume. If we get that move, then LEN will set up to re-test or possibly take out its next major support levels at its 200-day moving average of $38.07 to $36.33 a share. Any high-volume move below those levels will then give LEN a chance to tag $34 to $32 a share.

To see more potential earnings short squeeze plays, check out the Earnings Short-Squeeze Plays portfolio on Stockpickr.

-- Written by Roberto Pedone in Delafield, Wis.

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At the time of publication, author had no positions in stocks mentioned.

Roberto Pedone, based out of Delafield, Wis., is an independent trader who focuses on technical analysis for small- and large-cap stocks, options, futures, commodities and currencies. Roberto studied international business at the Milwaukee School of Engineering, and he spent a year overseas studying business in Lubeck, Germany. His work has appeared on financial outlets including

CNBC.com and Forbes.com.

You can follow Pedone on Twitter at www.twitter.com/zerosum24 or @zerosum24.