5 Stocks Set to Soar on Bullish Earnings

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, let's take a look at several stocks that could experience big short squeezes when they report earnings this week.

Zoe's Kitchen

My first earnings short-squeeze trade idea is fast casual Mediterranean cuisine restaurant player Zoe's Kitchen  (ZOES), which is set to release numbers on Thursday after the market close. Wall Street analysts, on average, expect Zoe's Kitchen to report revenue of $61.52 million on a loss of 1 cent per share.

The current short interest as a percentage of the float for Zoe's Kitchen is extremely high at 27%. That means that out of the 18.67 million shares in the tradable float, 5.28 million shares are sold short by the bears. The bears have also been increasing their bets from the last reporting period by 7%, or by about 360,000 shares. If the bears get caught pressing their bets into a bullish quarter, then shares of ZOES could easily spike sharply higher post-earnings as the bears move fast to cover some of their positions.

From a technical perspective, ZOES is currently trending below both its 50-day and 200-day moving averages, which is bearish. This stock recently formed a double bottom chart pattern, after shares found buying interest at $30.02 to $30.25 a share. Shares of ZOES have started to trend modestly higher off those support levels and it's beginning to trend within range of triggering a near-term breakout trade post-earnings.

If you're bullish on ZOES, 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 $32.72 a share and then above some near-term overhead resistance levels at $33.46 to $33.59 a share with high volume. Look for volume on that move that hits near or above its three-month average action of 385,005 shares. If that breakout triggers post-earnings, then shares of ZOES will set up to re-test or possibly take out its next major overhead resistance levels at $35.67 to its 52-week high of $38.42 a share. Any high-volume move above $38.42 will then give ZOEZ a chance to tag or trend north of $40 a share.

I would simply avoid ZOES 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 $30.25 to $30.02 a share with high volume. If we get that move, then ZOES will set up to re-test or possibly take out its next major support levels at $28.10 to its 52-week low of $27.09 a share. Any high-volume move below $27.09 will then set up ZOES to tag or trend below $25a share.

Five Below

Another potential earnings short-squeeze trading opportunity is specialty value retailer Five Below  (FIVE), which is set to release numbers on Wednesday after the market close. Wall Street analysts, on average, expect Five Below to report revenue $151.32 million on earnings of 7 cents per share.

The current short interest as a percentage of the float for Five Below is extremely high at 20%. That means that out of the 52.71 million shares in the tradable float, 11.03 million shares are sold short by the bears. This is a large short interest on a stock with a relatively low tradable float. If the bulls get the earnings news they're looking for, then shares of FIVE could easily ramp sharply higher post-earnings as the bears move fast to cover some of their positions.

From a technical perspective, FIVE is currently trending below both its 50-day and 200-day moving averages, which is bearish. This stock has been for the most part consolidating and trending sideways over the last two months, with shares moving between $31.82 on the downside and $37.43 on the upside. Shares of FIVE have now started to spike above some near-term support at $32.83 and it's beginning to trend within range of triggering a big breakout trade above the upper-end of its recent sideways trending chart pattern.

If you're in the bull camp on FIVE, then I would wait until after its report and look for long-biased trades if this stock manages to break out above some key overhead resistance levels at $34.97 to $36.47 a share and then above $37.43 a share with high volume. Look for volume on that move that registers near or above its three-month average volume of 1.15 million shares. If that breakout gets started post-earnings, then FIVE will set up to re-fill some of its previous gap-down-day zone from January that started near $44 a share.

I would simply avoid FIVE 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 $32.83 to $31.82 a share with high volume. If we get that move, then FIVE will set up to re-test or possibly take out its next major support levels at $30 to $29 a share, or even its 52-week low of $28.51 a share.

Chris Laudani says that first-quarter results should be "catalyst the stock needs to move much higher," and Richard Saintvilus thinks the stock is still undervalued.

UTi Worldwide

Another potential earnings short-squeeze candidate is non-asset-based supply chain services and solutions player UTi Worldwide  (UTIW), which is set to release numbers on Thursday after the market close. Wall Street analysts, on average, expect UTi Worldwide to report revenue of $1.02 billion on a loss of 15 cents per share.

The current short interest as a percentage of the float for The UTi Worldwide is pretty high at 19%. That means that out of the 91.39 million shares in the tradable float, 17.62 million shares are sold short by the bears. The bears have also been increasing their bets from the last reporting period by 3.5%, or by about 599,000 shares. If the bears get caught pressing their bets into a strong quarter, then shares of UTIW could easily rip sharply higher post-earnings as the bears scramble to cover some of their positions.

From a technical perspective, UTIW is currently trending below both its 50-day and 200-day moving averages, which is bearish. This stock has been consolidating and trending sideways for the last two months, with shares moving between $8.74 on the downside and $10.50 a share on the upside. Any high-volume move above the upper-end of its recent sideways trending chart pattern post-earnings could trigger a major breakout trade for shares of UTIW.

If you're bullish on UTIW, 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 $10.05 to its gap-down-day high from late March at around $10.50 a share with high volume. Look for volume on that move that hits near or above its three-month average action of 1.37 million shares. If that breakout develops post-earnings, then UTIW will set up to re-fill some of its previous gap-down-day zone from March that started at $12.50 a share. if that gap gets filled post-earnings, then UTIW could even tag $14 to $15 a share.

I would avoid UTIW 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 $9.50 to its 52-week low of $8.74 a share with high volume. If we get that move, then UTIW will set up to enter new 52-week-low territory, which is bearish. Some possible downside targets off that move are $7 to $6 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 $320.54 million on earnings of 3 cents per share.

The current short interest as a percentage of the float for Lands' End is extremely high at 27%. That means that out of 16.42 million shares in the tradable float, 4.50 million shares are sold short by the bear. The bears have also been increasing their bets from the last reporting period by 18.3%, or by about 695,00 shares. If the bears get caught pressing their bets into a bullish quarter, then shares of LE could easily jump sharply higher post-earnings as the bears begin to cover some of their trades.

From a technical perspective, LE is currently trending below both its 50-day and 200-day moving averages, which is bearish. This stock has been downtrending over the last five month, with shares moving lower from its high of over $42.50 to its recent low of $28.50 a share. During that move, shares of LE have been making mostly lower highs and lower lows, which is bearish technical price action.

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 some key overhead resistance levels at $30.35 to its 50-day moving average of $31.38 a share with high volume. Look for volume on that move that hits near or above its three-month average volume of 259,709 shares. If that breakout begins post-earnings, then LE will set up to re-test or possibly take out its next major overhead resistance levels at $35 to $36.47 a share, or even $38 a share.

I would simply avoid LE 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 $28.50 to its 52-week low of $26.31a 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 level at its all-time low of $25.35 a share. Any high-volume move below that level should be considered extremely bearish price action.

Joy Global

My final earnings short-squeeze play is mining equipment player Joy Global  (JOY), which is set to release numbers on Thursday before the market open. Wall Street analysts, on average, expect Joy Global to report revenue of $809.94 million on earnings of 56 cents per share.

The current short interest as a percentage of the float for Joy Global is pretty high at 13.6%. That means that out of the 96.71 million shares in the tradable float, 13.22 million shares are sold short by the bears. If this company can deliver the earnings news the bulls are looking for, then shares of JOY could easily spike sharply higher post-earnings as the bears jump to cover some of their positions.

From a technical perspective, JOY is currently trending below both its 50-day and 200-day moving averages, which is bearish. This stock has been attempting to carve out a major bottoming chart pattern over the last three months, since shares of JOY have been finding buying interest each time it has pulled back to around $38 a share, or just below that level. Shares of JOY are now starting to bounce higher just above those support levels and that move is beginning to push the stock within range of triggering a big breakout trade post-earnings.

If you're in the bull camp on JOY, 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 $40.57 to its 50-day moving average of $40.68 a share and then above $41.29 a share with high volume. Look for volume on that move that hits near or above its three-month average action of 1.91 million shares. If that breakout hits post-earnings, then JOY will set up to re-test or possibly take out its next major overhead resistance levels at $43 to $44.50 a share, or even $45 to its 200-day moving average of $47.26 a share.

I would avoid JOY 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 $38.21 to $38.06 a share and then below its 52-week low of $37.58 a share with high volume. If we get that move, then JOY will set up to enter new 52-week-low territory, which is bearish technical price action. Some possible downside targets off that move are $33 to $30 a share.

This article is commentary by an independent contributor. At the time of publication, the author held no positions in the stocks mentioned.

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