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.

China Finance Online

My first earnings short-squeeze play is integrated financial information and services provider China Finance Online (JRJC) , which is set to release numbers on Monday after the market close. Wall Street analysts, on average, expect China Finance Online to report revenue of $94.70 million.

The current short interest as a percentage of the float for China Finance Online is pretty high at 12.7%. That means that out of the 9.16 million shares in the tradable float, 1.16 million shares are sold short by the bears. This is a low float high short interest situation for shares JRJC. Any bullish earnings news could easily set off a large short-squeeze that forces the bears to cover some of the positions.

From a technical perspective, JRJC is currently trending above both its 50-day and 200-day moving averages, which is bullish. This stock has been uptrending over the last few weeks, with shares moving higher from its low of $6.86 to its recent high of $9.50 a share. During that uptrend, shares of JRJC have been consistently making higher lows and higher highs, which is bullish technical price action. That move has now pushed shares of JRJC within range of triggering a big breakout trade post-earnings.

If you're bullish on JRJC, then I would wait until after its report and look for long-biased trades if this stock manages to break out above some key near-term overhead resistance levels at $9.50 to $9.57 a share with high volume. Look for volume on that move that registers near or above its three-month average action of 3.62 million shares. If that breakout triggers post-earnings, then JRJC will set up to re-test or possibly take out its 52-week high at $11.88 a share. Any high-volume move above that level will then give JRJC a chance to trend north of $12 a share.

I would simply avoid JRJC 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 $8 a share with high volume. If we get that move, then JRJC will set up to re-test or possibly take out its next major support levels at its 50-day moving average of $6.90 a share to $6.86 a share. Any high-volume move below those levels will then give JRJC a chance to re-test or possibly take out its 200-day moving average of $5.46 a share.

Synnex

Another potential earnings short-squeeze trade idea is business services provider Synnex (SNX) , which is set to release its numbers on Monday after the market close. Wall Street analysts, on average, expect Synnex to report revenue $3.40 billion on earnings of $1.48 per share.

The current short interest as a percentage of the float for SYNNEX is pretty high at 9.2%. That means that out of the 28.04 million shares in the tradable float, 2.60 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 spark a sharp short-covering rally for shares of SNX post-earnings.

From a technical perspective, SNX is currently trending below both its 50-day and 200-day moving averages, which is bearish. This stock has been downtrending for the last month, with shares moving lower from its high of $71.50 to its recent low of $59.75 a share. During that downtrend, shares of SNX have been making mostly lower highs and lower lows, which is bearish technical price action. That said, shares of SNX have recently started to bounce off that $59.75 low and it's starting to move within range of triggering a near-term breakout trade post-earnings.

If you're in the bull camp on SNX, then I would wait until after its report and look for long-biased trades if this stock manages to break out above its 200-day moving average of $64.35 a share to its 50-day moving average at $65.47 a share with high volume. Look for volume on that move that hits near or above its three-month average volume of 285,038 shares. If that breakout starts post-earnings, then SNX will set up to re-test or possibly take out its next major overhead resistance levels at $71.50 to $74.57 a share.

I would simply avoid SNX or look for short-biased trades if after earnings it fails to trigger that breakout and then drops back below some key support levels at $59.75 to $59.30 a share and then below more past support at $58.47 a share with high volume. If we get that move, then SNX will set up to re-test or possibly take out its next major support level at its 52-week low of $51.65 a share.

Cintas

Another potential earnings short-squeeze candidate is identity uniforms and related business services provider Cintas (CTAS) , which is set to release numbers on Monday after the market close. Wall Street analysts, on average, expect Cintas to report revenue of $1.10 billion on earnings of 75 cents per share.

The current short interest as a percentage of the float for Cintas is notable at 6.4%. That means that out of the 97.03 million shares in the tradable float, 6.22 million shares are sold short by the bears. If this company can produce strong earnings results that the bulls like, then shares of CTAS could easily jump sharply higher post-earnings as the shorts rush to cover some of their trades.

From a technical perspective, CTAS is currently trending above both its 50-day and 200-day moving averages, which is bullish. This stock has been uptrending strong for the last six months, with shares moving higher from its low of $55.65 to its recent high of $67.59 a share. During that uptrend, shares of CTAS have been consistently making higher lows and higher highs, which is bullish technical price action. That move has now pushed shares of CTAS within range of triggering a near-term breakout trade post-earnings

If you're bullish on CTAS, then I would wait until after its report and look for long-biased trades if this stock manages to break out above some key near-term overhead resistance levels at $67 to its 52-week high of $67.59 a share with high volume. Look for volume on that move that hits near or above its three-month average action of 458,114 shares. If that breakout develops post-earnings, then CTAS will set up to enter new 52-week-high territory, which is bullish technical price action. Some possible upside targets off that breakout are $80 to $85 a share.

I would avoid CTAS 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 $65.81 to its 50-day moving average of $65.42 a share with high volume. If we get that move, then CTAS will set up to re-test or possibly take out its next major support levels at $62.24 to its 200-day moving average of $61.31 a share.

AZZ

Another earnings short-squeeze prospect is electrical equipment and components maker and engineering services provider AZZ (AZZ) , which is set to release numbers on Wednesday before the market open. Wall Street analysts, on average, expect AZZ to report revenue of $208.18 million on earnings of 63 cents per share.

The current short interest as a percentage of the float for AZZ stands at 4.4%. That means that out of the 24.79 million shares in the tradable float, 1.09 million shares are sold short by the bears. This isn't a huge short interest, but it's more than enough to spark a decent short-covering rally post-earnings if the bulls get the earnings news they're looking for.

From a technical perspective, AZZ is currently trending below both its 50-day and 200-day moving averages, which is bearish. This stock has been downtrending over the last month, with shares moving lower from its high of $47.46 to its intraday low of $42.52 a share. During that downtrend, shares of AZZ have been consistently making lower highs and lower lows, which is bearish technical price action.

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 back above its 200-day moving average of $44.40 a share and then above its 50-day moving average of $45.14 a share with high volume. Look for volume on that move that hits near or above its three-month average action of 125,659 shares. If that breakout kicks off post-earnings, then AZZ will set up to re-test or possibly take out its next major overhead resistance levels at $47.46 to its 52-week high at $49.64 a share. Any high-volume move above those levels 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 $42.38 to $41.18 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 $39.63 to its 52-week low of $37.50 a share. Any high-volume move below those levels will then give AZZ a chance to re-test or possibly take out its next major support levels at $34.17 a share.

Acuity Brands

My final earnings short-squeeze play lighting solutions provider Acuity Brands (AYI) , which is set to release numbers on Wednesday before the market open. Wall Street analysts, on average, expect Acuity Brands to report revenue of $649.22 million on earnings of $1.22 per share.

The current short interest as a percentage of the float for Acuity Brands sits at 3.92%. That means that out of the 42.35 million shares in the tradable float, 1.65 million shares are sold short by the bears. The bears have also been increasing their bets from the last reporting period by 14%, or by 203,000 shares. If the bears get caught pressing their bets into a bullish quarter, then shares of AYI could easily rip sharply higher post-earnings as the shorts rush to cover some of their bets.

From a technical perspective, AYI 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 downtrending a bit over the last few weeks, with shares moving lower from its high of $125.95 to its intraday low of $119.50 a share. During that downtrend, shares of AYI have been making mostly lower highs and lower lows, which is bearish technical price action. That said, shares of AYI have for now started to find some support just above its 50-day moving average of $118.53 a share.

If you're in the bull camp on AYI, 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 its 200-day moving average of $124.25 a share to more resistance at $125.95 a share with high volume. Look for volume on that move that registers near or above its three-month average action of 466,681 shares. If that breakout develops post-earnings, then AYI will set up to re-test or possibly take out its next major overhead resistance levels at $132.50 to $138.30 a share.

I would avoid AYI or look for short-biased trades if after earnings it fails to trigger that breakout, and then drops back below both its 50-day moving average of $118.53 a share with high volume. If we get that move, then AYI will set up to re-test or possibly take out its next major support levels at $110 to $104.69 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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