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5 Earnings Stocks That Could Explode

Pacific Sunwear of California

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My first earnings short squeeze candidate is Pacific Sunwear of California (PSUN - Get Report), which is set to report its results on Tuesday after the market close. This is a specialty retailer rooted in the action sports, fashion and music influences of the California lifestyle. The company sells casual apparel with a limited selection of accessories and footwear designed to meet the needs of teens and young adults. Wall Street analysts, on average, expect Pacific Sunwear to report revenues of $211.80 million on a loss of 24 cents per share.

This stock is currently trading near its 52-week low of $1.86 with shares changing hands at around $2 a share. The bears have been coining money ahead of the quarter, since shares of PSUN have fallen from over $4.06 in early May to its current price of under $2. If Pacific Sunwear can report a decent quarter and guide higher, then we could see the bears cover some of their winning short bets and lock in profits. If the bears cover, then then the stock could spike much higher from current levels.

The current short interest as a percentage of the float for Pacific Sunwear is an extremely large 23.3%. That means that out of the 35.40 million shares in the tradable float, 10.43 million are sold short by the bears. This is a huge short interest on a stock with a very small float. Any short covering rally that's spurred by bullish news could easily spike this stock significantly higher.

From a technical standpoint, shares of Pacific Sunwear are trading below both its 50-day and 200-day moving averages, which is bearish. The stock has recently hit a 52-week low and found some buying support at around $1.86 a share. The current reading on the relative strength index (RSI) is flashing an oversold condition at 29. Oversold can always get more oversold, but if the trend changes here for PSUN then this stock could bounce big.

I would look to buy this stock after they report if you see it trade above $2.22 a share on heavy volume. Look for volume that's greater than or close to its three-month average volume of 1.1 million shares. I would add to any long position if you see shares of PSUN trade above its 50-day moving average of $2.57 a share on solid volume. Target a run towards $3 to $3.15 a share if the bulls gain control of this stock following their earnings.
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