This Stock Could Squeeze Short Sellers Next Week

Urban Outfitters, Inc. (NASDAQ:URBN) stock is down 3% to trade at $73.16 today, after Citigroup downgraded the apparel retailer to "neutral" from "buy," though also lifting its price target to $76 from $75. The bear note comes one week before the company's second-quarter earnings report, due out after the close on Wednesday, August 27. Ahead of the event, options traders are betting bullishly.

Urban Outfitters has an intriguing post-earnings history. The stock has averaged a post-earnings move of only 11.5% -- regardless of direction -- over the last two years. The last three of those eight reports have been moves to the upside, including a 22.9% melt up in May. For Tuesday's trading, the options market is pricing in a larger than usual post-earnings move of 15.4%.

Calls have been the growing in numbers, per URBN's 10-day call/put volume ratio of 6.72 at the International Securities Exchange (ISE), Cboe Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX), which stands above 93% of readings from the past year.

The stock hit a record high of $80.71 on Aug. 7, but has been consolidating around this level since prior to today's pullback. Now, the shares are testing their 50-day moving average, a trendline that hasn't been breached on a closing basis since late April. Year to date, URBN is 33% higher. 

A short squeeze could help the equity break into new heights. Short interest tapered off by 5.3% in the most recent reporting period, yet the 10.8 million shares sold short account for 18.1% of URBN's total available float. At the stock's average pace of trading, it would take shorts more than five trading days to buy back their bearish bets.

Analyst upgrades are another storyline to monitor. After today's downgrade, six of the 12 brokerages covering the stock maintain "hold" ratings, while the consensus 12-month price target of $76.83 is only a 5% premium to its current perch. For a stock with a comfortable 81% gain int he last 12 months, an upbeat report could trigger a flurry of overdue bull notes.