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.

BlackBerry


My first earnings short-squeeze play is wireless communications solutions provider BlackBerry  (BBRY), which is set to release numbers on Tuesday before the market open. Wall Street analysts, on average, expect BlackBerry to report revenue of $683.65 million on a loss of 3 cents per share.

The current short interest as a percentage of the float for BlackBerry is very high at 17.8%. That means that out of the 489.25 million shares in the tradable float, 87.10 million shares are sold short by the bears. If this company can report the earnings news the bulls are looking for, then this stock could easily rip sharply higher post-earnings as the bears scramble to cover some of their positions.

From a technical perspective, BlackBerry 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 and change, with shares moving lower from its high of $11.09 to its recent low of $8.90 a share. During that downtrend, shares of BlackBerry have been making mostly lower highs and lower lows, which is bearish technical price action.

If you're bullish on BlackBerry, then I would wait until after its report and look for long-biased trades if this stock manages to break out above both its 50-day moving average of $9.89 a share and its 200-day moving average of $10.12 a share with high volume. Look for volume on that move that registers near or above its three-month average action of 8.34 million shares. If that breakout triggers post-earnings, then this stock will set up to re-test or possibly take out its next major overhead resistance levels at $11.09 to $11.45, or even its 52-week high of $12.63 a share.

I would simply avoid BlackBerry or look for short-biased trades if after earnings it fails to trigger that breakout and then drops back below its 52-week low of $8.59 a share with high volume. If we get that move, then this stock will set up to enter new 52-week-low territory, which is bearish technical price action. Some possible downside targets off that move are $7 to $6 a share.

Lennar


Another earnings short-squeeze trade idea is homebuilding player Lennar (LEN), which is set to release numbers on Wednesday before the market open. Wall Street analysts, on average, expect Lennar to report revenue $2.02 billion on earnings of 64 cents per share.

The current short interest as a percentage of the float for Lennar is very high at 16.5%. That means that out of the 179.36 million shares in the tradable float, 29.70 million shares are sold short by the bears. If the bulls get the earnings news they're looking for, then this stock could easily spike sharply higher post-earnings as the bears move fast to cover some of their trades.

From a technical perspective, Lennar is currently trending above both its 50-day and 200-day moving averages, which is bullish. This stock has been uptrending a bit over the last month, with shares moving higher from its low of $45.78 to its intraday high on Monday of $49.50 a share. During that uptrend, shares of Lennar have been making mostly higher lows and higher highs, which is bullish technical price action. That move has now pushed shares of Lennar within range of triggering a near-term breakout trade above some key overhead resistance levels post-earnings.

If you're in the bull camp on Lennar, 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 $50.14 to $52 a share and then above its 52-week high of $53.63 a share with high volume. Look for volume on that move that hits near or above its three-month average volume of 2.93 million shares. If that breakout kicks off post-earnings, then this stock will set up to enter new 52-week-high territory, which is bullish technical price action. Some possible upside targets off that move are $60 to $65 a share.

I would simply avoid Lennar 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 its 50-day of $47.54 to its 200-day at $45.72 a share with high volume. If we get that move, then this stock will set up to re-test or possibly take out its next major support levels at $43 to $41.18 a share, or even $38 a share.

Lennar was also featured recently in "5 Homebuilder Stocks Not Helped Much by Solid Housing Data."

Winnebago Industries

WGO Chart WGO data by YCharts

Another earnings short-squeeze candidate is recreational vehicles maker Winnebago Industries  (WGO), which is set to release numbers on Thursday before the market open. Wall Street analysts, on average, expect Winnebago Industries to report revenue of $261.44 million on earnings of 41 cents per share.

The current short interest as a percentage of the float for Winnebago Industries is very high at 17.1%. That means that out of the 53.85 million shares in the tradable float, 9.25 million shares are sold short by the bears. The right earnings news from Winnebago Industries could easily spark a large short-squeeze post-earnings that sends the bears scrambling to cover some of their positions.

From a technical perspective, Winnebago Industries 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 and change, with shares moving lower from its high of $22.67 to its recent low of $19.75 a share. During that downtrend, this stock has been making mostly lower highs and lower lows, which is bearish technical price action.

If you're bullish on Winnebago Industries, then I would wait until after its report and look for long-biased trades if this stock manages to break out above both its 50-day at $21.17 and its 200-day at $21.96 a share with high volume. Look for volume on that move that registers near or above its three-month average action of 478,888 shares. If that breakout develops post-earnings, then this stock will set up to re-test or possibly take out its next major overhead resistance levels at $22.67 to $24.16 a share, or even $26.21 a share.

I would avoid Winnebago Industries 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 $19.75 to its 52-week low of $18.82 a share with high volume. If we get that move, then this stock will set up to enter new 52-week-low territory, which is bearish technical price action. Some possible downside targets off that move are $16.50 to $14 a share.

Sonic

Another earnings short-squeeze prospect is quick-service drive-in restaurants player Sonic  (SONC), which is set to release numbers on Monday after the market close. Wall Street analysts, on average, expect Sonic to report revenue of $164.17 million on earnings of 36 cents per share.

The current short interest as a percentage of the float for Sonic is notable 8.8%. That means that out of 49.50 million shares in the tradable float, 4.35 million shares are sold short by the bear. This is a decent short interest on a stock with a relatively low tradable float. If the bulls get the earnings news they're looking for, then this stock could easily rip sharply higher post-earnings as the bears jump to cover some of their positions.

From a technical perspective, Sonic is currently trending above both its 50-day and 200-day moving averages, which is bullish. This stock has been uptrending over the last two months, with shares moving higher from its low of $29.59 to its recent high of $34.10 a share. During that move, shares of Sonic have been making mostly higher lows and higher highs, which is bullish technical price action. That move has now pushed this stock within range of triggering a big breakout trade post-earnings.

If you're bullish on Sonic, then I would wait until after its report and look for long-biased trades if this stock manages to break out above its 52-week high at $36.73 a share with high volume. Look for volume on that move that hits near or above its three-month average volume of 1.02 million shares. If that breakout kicks off post-earnings, then this stock will set up to enter new 52-week-high territory, which is bullish technical price action. Some possible upside targets off that move are $45 to $50 a share.

I would simply avoid Sonic or look for short-biased trades if after earnings it fails to trigger that breakout and then drops back below its 50-day at $30.64 a share with high volume. If we get that move, then this stock will set up to re-test or possibly take out its next major support levels at its 200-day of $28.42 to around $25 a share.

Sonic was also featured recently in "McDonald's Is Shrinking in the U.S. but These 5 Rivals Just Keep Growing." Jim Cramer recently praised Sonic and said he anticipates a solid quarter from the company.

Darden Restaurants


My final earnings short-squeeze play is full service restaurants player Darden Restaurants  (DRI), which is set to release numbers on Tuesday before the market open. Wall Street analysts, on average, expect Darden Restaurants to report revenue of $1.87 billion on earnings of 93 cents per share.

The current short interest as a percentage of the float for Darden Restaurants stands at 4.9%. That means that out of the 113.03 million shares in the tradable float, 5.56 million shares are sold short by the bears. The bears have also been increasing their bets from the last reporting period by 12.1%, or by around 3.46 million shares. 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 news they're looking for.

From a technical perspective, Darden Restaurants is currently trending above both its 50-day and 200-day moving averages, which is bullish. This stock has been uptrending over the last two months, with shares moving higher from its low of around $61.31 a share to its recent high of $69.49 a share. During that uptrend, this stock has been making mostly higher lows and higher highs, which is bullish technical price action. That move has now pushed shares of Darden Restaurants within range of triggering a major breakout trade post-earnings.

If you're in the bull camp on Darden Restaurants, 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 $69.43 to $69.80 a share and then above its 52-week high of $70.38 a share with high volume. Look for volume on that move that registers near or above its three-month average action of 1.47 million shares. If that breakout develops post-earnings, then this stock will set up to enter new 52-week-high territory, which is bullish technical price action. Some possible upside targets off that mover are $75 to $80 a share, or even $85 a share.

I would avoid Darden Restaurants or look for short-biased trades if after earnings it fails to trigger that breakout, and then drops back below some near-term support levels at $67 a share and then below its 50-day moving average of $65.43 a share with high volume. If we get that move, then this stock will set up to re-test or possibly take out its next major support levels at $61.31 to its 200-day moving average of $59.02 a share.

Darden was featured recently in "Buy Darden Restaurants for the Value, Ignore the Price," and here's Jim Cramer's recent take on the stock.

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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