5 Hated Earnings Stocks You Should Love

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.

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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 Wall Street doesn't like the numbers or guidance.

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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.

Netflix

My first earnings short-squeeze play is Internet television network player Netflix (NFLX), which is set to release numbers on Monday after the market close. Wall Street analysts, on average, expect Netflix to report revenue of $1.33 billion on earnings of $1.16 per share.

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Recently, MKM Partners said that consensus estimates for Netflix's second-quarter results are conservative, given the company's guidance and adoption trends. MKM thinks the stock could double or triple in the next four to five years. The firm has a $435 per share price target and a buy rating on the stock.

The current short interest as a percentage of the float for Netflix is pretty high at 9.3%. That means that out of the 58.71 million shares in the tradable float, 5.25 million shares are sold short by the bears. This is a decent short interest on a stock with a relatively low tradable float. Any bullish earnings news could easily set this stock off on a large short squeeze that could force the bears to start covering some of their bets.

From a technical perspective, NFLX is currently trending above both its 50-day and 200-day moving averages, which is bullish. This stock is gapping higher today ahead of its earnings report as shares have started to bounce sharply higher right above some near-term support at $428.20 a share. That move is quickly pushing shares of NFLX within range of triggering a major breakout trade above some key near-term overhead resistance levels.

If you're bullish on NFLX, 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 around $460 to its 52-week high at $475.87 a share with high volume. Look for volume on that move that hits near or above its three-month average volume of 3.23 million shares. If that breakout hits post-earnings, then NFLX will set up to enter new 52-week-high territory, which is bullish technical price action. Some possible upside targets off that breakout are $500 to $520 a share.

I would simply avoid NFLX 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 $428.20 to its 50-day moving average of $420.79 a share high volume. If we get that move, then NFLX will set up to re-test or possibly take out its next major support levels at $400 to $380 a share.

World Acceptance

Another potential earnings short-squeeze trade idea is small-loan consumer finance player World Acceptance (WRLD), which is set to release its numbers on Tuesday before the market open. Wall Street analysts, on average, expect World Acceptance to report revenue $151.68 million on earnings of $2.25 per share.

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The current short interest as a percentage of the float for World Acceptance is extremely high at 58%. That means that out of the 6.95 million shares in the tradable float, 4.01 million shares are sold short by the bears. This is an enormous short interest on a stock with an extremely low tradable float. If the bulls get the earnings news they're looking for, then shares of WRLD could easily explode to the upside post-earnings as the bears rush to cover some of their positions.

From a technical perspective, WRLD is currently trending below both its 50-day and 200-day moving averages, which is bearish. This stock has been basing and consolidating for the last three months and change, with shares moving between $71.58 on the downside and $83.22 on the upside. Shares of WRLD are now starting to spike higher above the lower end of its recent range and it's beginning to move close to triggering a near-term breakout trade above the upper end of its sideways trading chart pattern post-earnings.

If you're in the bull camp on WRLD, then I would wait until after its report and look for long-biased trades if this stock manages to break out above its 50-day moving average of $77.42 and then once it takes out more key overhead resistance levels at $80 to $81.26 a share with high volume. Look for volume on that move that hits near or above its three-month average action of 149,738 shares. If that breakout starts post-earnings, then WRLD will set up to re-test or possibly take out its next major overhead resistance levels at $83.22 to its 200-day moving average of $86.28 a share. Any high-volume move above those levels will then give WRLD a chance to tag $90 to $95 a share.

I would simply avoid WRLD 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 $74 to $73.50 a share with high volume. If we get that move, then WRLD will set up to re-test or possibly take out its next major support levels at $71.63 to its 52-week low at $71.58 a share. Any high-volume move below $71.58 will then push shares of WRLD into new 52-week-low territory, which is bearish technical price action.

iRobot

Another potential earnings short-squeeze candidate is consumer, defense and security applications robot maker iRobot (IRBT), which is set to release numbers on Tuesday after the market close. Wall Street analysts, on average, expect iRobot to report revenue of $142.51 million on earnings of 22 cents per share.

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This company has beaten analysts estimates for GAAP earnings in the past four consecutive quarters, so another beat for this coming quarter could provide for a sharp boost higher to iRobot's stock price post-earnings.

The current short interest as a percentage of the float for iRobot is extremely high at 33%. That means that out of the 28.36 million shares in the tradable float, 9.85 million shares are sold short by the bears. This is another stock with a very high short-interest and a low tradable float. Any bullish earnings news post-earnings could easily set off a large short squeeze for shares of IRBT as the bears jump to cover some of their positions.

From a technical perspective, IRBT is currently trending above both its 50-day and its 200-day moving averages, which is bullish. This stock is starting to bounce higher today right above some near-term support at $35.62 a share. That bounce is quickly pushing shares of IRBT within range of triggering a big breakout trade above some key near-term overhead resistance levels post-earnings.

If you're bullish on IRBT, 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 $38.48 to $39 a share with high volume. Look for volume on that move that hits near or above its three-month average action of 740,014 shares. If that breakout materializes post-earnings, then IRBT will set up to re-test or possibly take out its next major overhead resistance levels at $42 to $45 a share, or even its 52-week high at $48.36 a share.

I would avoid IRBT or look for short-biased trades if after earnings it fails to trigger that breakout and then takes out some key near-term support levels at $35.62 to $34 a share with high volume. If we get that move, then IRBT will set up to re-test or possibly take out its next major support levels at $30 its 52-week low at $28.90 a share.

NeuStar

Another earnings short-squeeze prospect is technology and directory services player NeuStar (NSR), which is set to release numbers on Wednesday after the market close. Wall Street analysts, on average, expect NeuStar to report revenue of $233.05 million on earnings of 90 cents per share.

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The current short interest as a percentage of the float for NeuStar is extremely high at 41%. That means that out of the 53.71 million shares in the tradable float, 22.42 million shares are sold short by the bears. The bears have also been increasing their bets from the last reporting period by 10.5%, or by about 2.13 million shares. If the bears get caught pressing their bets into a bullish quarter, then shares of NSR could easily explode sharply higher post-earnings as the bears rush to cover some of their trades.

From a technical perspective, NSR is currently trending above its 50-day moving average and well below its 200-day moving average, which is neutral trendwise. This stock is basing right now right above its 50-day moving average of $26.47 a share. That move has shares of NSR trending within range of triggering a near-term breakout trade post-earnings.

If you're bullish on NSR, 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 $27.57 to $27.75 a share with high volume. Look for volume on that move that hits near or above its three-month average action of 1.60 million shares. If that breakout begins post-earnings, then NSR will set up to re-test or possibly take out its next major overhead resistance levels at $29.50 to $29.75 a share. Any high-volume move above those levels will then give NSR a chance to tag its next major overhead resistance levels at $35 to $36.75 a share.

I would simply avoid NSR or look for short-biased trades if after earnings it fails to trigger that breakout and then takes out its 50-day moving average of $26.47 a share to some more key support at $25.75 a share with high volume. If we get that move, then NSR will set up to re-test or possibly take out its next major support level at its 52-week low of $23.82 a share.

Jakks Pacific

My final earnings short-squeeze trade idea is traditional toys and electronics player Jakks Pacific (JAKK), which is set to release numbers on Wednesday before the market open. Wall Street analysts, on average, expect Jakks Pacific to report revenue of $112.86 million on a loss of 29 cents per share.

Just recently, Needham upgraded shares of Jakks Pacific to buy from hold based on sales momentum acceleration, a stronger financial position and operating leverage. The firm also slapped a $10 per share price target on the stock.

The current short interest as a percentage of the float for Jakks Pacific is extremely high at 74%. That means that out of the 12.92 million shares in the tradable float, 9.56 million shares are sold short by the bears. This is a monster short interest on a stock with an extremely low tradable float. If this company delivers the earnings news the bulls are looking for, then shares of JAKK could easily explode sharply higher post-earnings as the bears rush to cover some of their bets.

From a technical perspective, JAKK is currently trending above both its 50-day and 200-day moving averages, which is bullish. This stock has been uptrending for the last two months, with shares moving higher from its low of $7.17 to its recent high of $8.58 a share. During that uptrend, shares of JAKK have been consistently making higher lows and higher highs, which is bullish technical price action. That move has now pushed shares of JAKK within range of triggering a major breakout trade post-earnings.

If you're in the bull camp on JAKK, 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 $8.58 to $8.97 a share and then once it takes out more resistance at $9.18 to its 52-week high at $9.48 a share with high volume. Look for volume on that move that hits near or above its three-month average volume of 535,189 shares. If that breakout kicks off post-earnings, then JAKK will set up to enter new 52-week-high territory above $9.48, which is bullish technical price action. Some possible upside targets off that breakout are $11.75 to $12, or even $13 a share.

I would avoid JAKK 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 $7.66 to $7.17 a share with high volume. If we get that move, then JAKK will set up to re-test or possibly take out its next major support levels at its 200-day moving average of $6.99 to $6.50 a share. Any high-volume move below $6.50 will then set up JAKK to re-fill some of its previous gap-up-day zone from February that started at $5.75 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.

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