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.

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.

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.

Lululemon Athletica

My first earnings short-squeeze play is athletic apparel and accessories player Lululemon Athletica (LULU) , which is set to release numbers on Thursday before the market open. Wall Street analysts, on average, expect Lululemon Athletica to report revenue of $376.80 million on earnings of 29 cents per share.

The current short interest as a percentage of the float for Lululemon Athletica is extremely high at 21.2%. That means that out of the 114.93 million shares in the tradable float, 24.40 million shares are sold short by the bears. If this company can deliver the earnings news the bulls are looking for, then shares of LULU could easily spike sharply higher post-earnings as the bears rush to cover some of their trades.

From a technical perspective, LULU is currently trending below both its 50-day and 200-day moving averages, which is bearish. This stock has recently formed a major bottoming chart pattern, since shares have found buying interest each time over the last two months when the stock has pulled back to just under $38 a share. If that bottom can hold post-earnings, then shares of LULU could easily rip higher and break out above some near-term overhead resistance levels.

If you're bullish on LULU, 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 $39.50 a share with high volume. Look for volume on that move that hits near or above its three-month average action of 3.33 million shares. If that breakout hits post-earnings, then LULU will set up to re-test or possibly take out its next major overhead resistance levels at $42.14 to $43.71 a share. Any high-volume move above those levels will then give LULU a chance to tag its next major overhead resistance levels at $46.29 to $46.78 a share.

I would simply avoid LULU 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 $38.51 to $37.26 a share with high volume. If we get that move, then LULU will set up to re-test or possibly take out its 52-week low of $36.26 a share. Any high-volume move below that level will then push shares of LULU into new 52-week-low territory, which is bearish technical price action.

Krispy Kreme Doughnuts

Another potential earnings short-squeeze play is doughnuts, beverages, and treats and packages sweets retailer Krispy Kreme Doughnuts (KKD) , which is set to release its numbers on Tuesday after the market close. Wall Street analysts, on average, expect Krispy Kreme Doughnuts to report revenue $118.13 million on earnings of 16 cents per share.

The current short interest as a percentage of the float for Krispy Kreme Doughnuts is notable at 7.7%. That means that out of the 63.51 million shares in the tradable float, 4.90 million shares are sold short by the bears. If the bulls get the earnings news they're looking for, then shares of KKD could easily trend sharply higher post-earnings as the bears move fast to cover some of their positions.

From a technical perspective, KKD is currently trending above its 50-day moving average and just below its 200-day moving average, which is neutral trendwise. This stock has been uptrending for the last month and change, with shares moving higher from its low of $14.82 to its recent high of $17.80 a share. During that uptrend, shares of KKD have been consistently making higher lows and higher highs, which is bullish technical price action. That move has now pushed shares of KKD within range of triggering a near-term breakout trade post-earnings.

If you're in the bull camp on KKD, 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 $17.80 a share to its 200-day moving average of $17.87 a share with high volume. Look for volume on that move that registers near or above its three-month average volume of 609,241 shares. If that breakout develops post-earnings, then KKD will set up to re-test or possibly take out its next major overhead resistance levels at $19.30 to $21.20 a share. Any high-volume move above $21.30 will then give KKD a chance to re-fill some of its previous gap-down-day zone from last January that started near $25 a share.

I would simply avoid KKD 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 $16.09 a share with high volume. If we get that move, then KKD will set up to re-test or possibly take out its next major support level at its 52-week low of $14.82 a share. Any high-volume move below that level will then push shares of KKD into new 52-week-low territory, which is bearish technical price action.

Restoration Hardware

Another potential earnings short-squeeze candidate is home furnishings retailer Restoration Hardware (RH) , which is set to release numbers on Wednesday after the market close. Wall Street analysts, on average, expect Restoration Hardware to report revenue of $454.38 million on earnings of 64 cents per share.

The current short interest as a percentage of the float for Restoration Hardware is extremely high at 22.7%. That means that out of the 32.31 million shares in the tradable float, 7.35 million shares are sold short by the bears. The bears have also been increasing their bets from the last reporting period by 11.6%, or by 762,000 shares. If the bears get caught pressing their bets into a bullish quarter, then shares of RH could easily jump sharply higher post-earnings as the shorts move to cover some of their positions.

From a technical perspective, RH is currently trending above its 200-day moving average and just below its 50-day moving average, which neutral trendwise. This stock has been trending sideways over the last two months and change, with shares moving between $79.11 on the downside and $90.71 on the upside. Shares of RH have recently started to spike modestly higher off that $79.11 low and it's now starting to move within range of triggering a near-term breakout trade post-earnings.

If you're bullish on RH, 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 $85.05 a share and then above some more near-term resistance at $90.71 a share with high volume. Look for volume on that move that registers near or above its three-month average action of 1.20 million shares. If that breakout hits post-earnings, then RH will set up to re-test or possibly take out its next major overhead resistance level at its all-time high of $94.50 a share. Any high-volume move above that level will then give RH a chance to make a run at $100 a share.

I would avoid RH 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 at $79.11 a share with high volume. If we get that move, then RH will set up to re-fill some of its previous gap-up-day zone from June that started near $67.50 a share.

Lands' End

Another earnings short-squeeze prospect is multi-channel retailer Lands' End (LE) , which is set to release numbers on Thursday before the market open. Wall Street analysts, on average, expect Lands' End to report revenue of $333.06 million on earnings of 17 cents per share.

The current short interest as a percentage of the float for Lands' End is extremely high at 31.9%. That means that out of the 13.66 million shares in the tradable float, 4.36 million shares are sold short by the bears. The bears have also been increasing their bets from the last reporting period by 5.6%, or by 232,000 shares. If the bears get caught pressing their bets into a strong quarter, then shares of LE could easily spike sharply higher post-earnings as the shorts rush to cover some of their trades.

From a technical perspective, LE is currently trending below its 50-day moving average, which is bearish. This stock has been downtrending over the last month and change, with shares moving lower from its high of $37.92 to its recent low of $32.03 a share. During that move, shares of LE have been making mostly lower highs and lower lows, which is bearish technical price action. That said, shares of LE have now started to bounce off that $32.03 low and it's starting to trend within range of triggering a big breakout trade post-earnings.

If you're bullish on LE, 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 $34.86 to $36.57 a share with high volume. Look for volume on that move that hits near or above its three-month average action of 426,836 shares. If that breakout starts post-earnings, then LE will set up to re-test or possibly take out its next major overhead resistance level at its all-time high of $37.92 a share. Any high-volume move above that level will then give LE a chance to tag or take out $40 a share.

I would simply avoid LE or look for short-biased trades if after earnings it fails to trigger that breakout and then takes out some key near-term support at $32.03 a share with high volume. If we get that move, then LE will set up to re-test or possibly take out its next major support levels at $28 to its all-time low of $25.35 a share.

Park City Group

My final earnings short-squeeze trade idea is consumer goods supply chain software-as-a-service provider Park City Group (PCYG) , which is set to release numbers on Thursday after the market close. Wall Street analysts, on average, expect Park City Group to report revenue of $12.13 million.

The current short interest as a percentage of the float for Park City Group is notable at 5.2%. That means that out of the 10.41 million shares in the tradable float, 541,000 shares are sold short by the bears. This is a decent short interest on a stock with a very low tradable float. Any bullish earnings could easily spark a large short-covering rally for shares of PCYG post-earnings as the bears rush to cover some of their trades.

From a technical perspective, PCYG is currently trending above both its 50-day and 200-day moving averages, which is bullish. This stock has been consolidating and trending sideways for the last two months and change, with shares moving between $9.84 on the downside and $11.48 on the upside. Shares of PCYG have now started to trend back above its 50-day moving average of $10.62 a share and it's quickly moving within range of triggering a big breakout trade above some key near-term overhead resistance levels.

If you're in the bull camp on PCYG, 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 $11.08 to $11.48 a share with high volume. Look for volume on that move that registers near or above its three-month average action of 96,356 shares. If that breakout develops post-earnings, then PCYG will set up to re-test or possibly take out its next major overhead resistance levels at 13.50 to its 52-week high at $13.97 a share.

I would avoid PCYG 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 $10.16 to $9.84 a share with high volume. If we get that move, then PCYG will set up to re-test or possibly take out its next major support levels at $9 to $8.64 a share, or even $8 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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