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

Mattress Firm

My first earnings short-squeeze play is specialty mattress retailer Mattress Firm  (MFRM), which is set to release numbers on Tuesday after the market close. Wall Street analysts, on average, expect Mattress Firm to report revenue of $565.84 million on earnings of 39 cents per share.

The current short interest as a percentage of the float for Mattress Firm is extremely high at 30.7%. That means that out of the 15.17 million shares in the tradable float, 4.66 million shares are sold short by the bears. This is a large short interest on a stock with a very low tradable float. Any bullish earnings news could easily set off a monster short-squeeze for shares of MFRM post-earnings as the bears jump to cover some of their short positions.

From a technical perspective, MFRM is currently trending below both its 50-day and 200-day moving averages, which is bearish. This stock has been uptrending a bit over the last few weeks, with shares moving higher from its low of $55.26 to its recent high of $60.20 a share. During that uptrend, shares of MFRM have been making mostly higher lows and higher highs, which is bullish technical price action. That move has now pushed shares of MFRM within range of triggering a big breakout trade post-earnings.

If you're bullish on MFRM, 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 $60.20 to its 200-day moving average of $61.54 a share with high volume. Look for volume on that move that hits near or above its three-month average action of 294,091 shares. If that breakout hits post-earnings, then shares of MFRM will set up to re-test or possibly take out its next major overhead resistance levels at $66 to $70 a share.

I would simply avoid MFRM 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 $57 to $55 a share with high volume. If we get that move, then MFRM will set up to re-test or possibly take out its next major support levels at $47.50 to $45 a share.

Box

Another potential earnings short-squeeze trade idea is cloud-based enterprise content collaboration platform provider Box  (BOX), which is set to release its numbers on Wednesday after the market close. Wall Street analysts, on average, expect Box to report revenue $63.70 million on a loss of 31 cents per share.

The current short interest as a percentage of the float for Box is notable at 8.8%. That means that out of the 48.29 million shares in the tradable float, 4.29 million shares are sold short by the bears. If this company can produce the earnings news the bulls are looking for, then shares of BOX could easily soar sharply higher post-earnings as the bears move fast to cover some of their short positions.

From a technical perspective, BOX is currently trending above its 50-day moving average, which is bullish. This stock recently formed a major bottoming chart pattern, after shares found buying interest over the last four months at around $16.80 to $16.60 a share. This stock has now started to rebound off those levels and it's beginning to move within range of triggering a major breakout trade post-earnings above some key near-term overhead resistance levels.

If you're in the bull camp on BOX, 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 $17.99 to $18.61 a share with high volume. Look for volume on that move that hits near or above its three-month average volume of 712,348 shares. If that breakout develops post-earnings, then BOX will set up to re-test or possibly take out its next major overhead resistance levels at $20.58 to $21 a share, or even $22 a share.

I would simply avoid BOX 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 $16.60 to its 52-week low of $16.41 a share with high volume. If we get that move, then BOX will set up to enter new 52-week-low territory, which is bearish technical price action.

Lululemon Athletica

Another potential earnings short-squeeze candidate is athletic apparel player Lululemon Athletica  (LULU), which is set to release numbers on Tuesday before the market open. Wall Street analysts, on average, expect Lululemon Athletica to report revenue of $418.94 million on earnings of 33 cents per share.

The current short interest as a percentage of the float for Lululemon Athletica is rather high at 12.2%. That means that out of the 121.56 million shares in the tradable float, 14.87 million shares are sold short by the bears.

From a technical perspective, LULU is currently trending above its 200-day moving average and just below its 50-day moving average, which is neutral trendwise. This stock has been uptrending a bit over the last few weeks, with shares moving higher from its low of $58.25 to its recent high of $64.05 a share. During that uptrend, shares of LULU have been making mostly higher lows and higher highs, which is bullish technical price action. That move has now pushed shares of LULU within range of triggering a big breakout trade post-earnings.

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 some near-term overhead resistance levels at $64.05 to $66 a share with high volume. Look for volume on that move that hits near or above its three-month average action of 2.01 million shares. If that breakout materializes post-earnings, then LULU will set up to re-test or possibly take out its next major overhead resistance level at its 52-week high of $70 a share. Any high-volume move above that level will then give LULU a chance to tag $80 to $85 a share.

I would 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 $60 to $58.25 a share high volume. If we get that move, then LULU will set up to re-test or possibly take out its next major support levels at its 200-day moving average of $55.10 to $50 a share.

Layne Christensen

Another earnings short-squeeze prospect is water management, construction and drilling services player Layne Christensen  (LAYN), which is set to release numbers on Monday after the market close. Wall Street analysts, on average, expect Layne Christensen to report revenue of $189.64 million on a loss of 57 cents per share.

The current short interest as a percentage of the float for Layne Christensen is very high at 29%. That means that out of 16.93 million shares in the tradable float, 4.91 million shares are sold short by the bear. This is a large short interest on a stock with a very low tradable float. Any bullish earnings news could easily set off a monster short-squeeze for shares of LAYN post-earnings that forces the bears to cover some of their bets.

From a technical perspective, LAYN is currently trending below its 200-day moving average and just above its 50-day moving average, which is neutral trendwise. This stock has been downtrending over the last month, with shares falling from its high of $9.45 to its recent low of $7.34 a share. During that downtrend, shares of LAYN have been making mostly lower highs and lower lows, which is bearish technical price action.

If you're bullish on LAYN, 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 $7.97 a share to some more key overhead resistance levels at $9 to $9.45 a share with high volume. Look for volume on that move that hits near or above its three-month average volume of 301,044 shares. If that breakout kicks off post-earnings, then LAYN will set up to re-test or possibly take out its next major overhead resistance levels at $10.40 to $12 a share.

I would simply avoid LAYN 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 $7.34 a share to its 50-day moving average of $6.94 a share with high volume. If we get that move, then LAYN will set up to re-test or possibly take out its next major support levels at $5.50 to $5 a share.

Triangle Petroleum

My final earnings short-squeeze trading opportunity is independent energy player Triangle Petroleum  (TPLM), which is set to release numbers on Monday after the market close. Wall Street analysts, on average, expect Triangle Petroleum to report revenue of $140.32 million on a loss of 4 cents per share.

The current short interest as a percentage of the float for Triangle Petroleum is pretty high at 20.2%. That means that out of the 60.50 million shares in the tradable float, 12.22 million shares are sold short by the bears.

From a technical perspective, TPLM 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 over the last two months, after shares found buying interest at $4.82 to $4.79 a share. If that bottom can hold post-earnings and shares of TPLM can manage to break out above some near-term overhead resistance levels, then this stock could see a decent short-covering rally take hold.

If you're in the bull camp on TPLM, 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 $5.45 to $5.78 a share with high volume. Look for volume on that move that registers near or above its three-month average action of 1.28 million shares. If that breakout gets started post-earnings, then TPLM will set up to re-test or possibly take out its next major overhead resistance levels at $6.06 to $6.50 a share, or even $7 a share.

I would avoid TPLM 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 $4.80 to $4.56 a share and then below $4.43 a share with high volume. If we get that move, then TPLM will set up to re-test or possibly take out its next major support levels at $4 to $3.83 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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