5 Hated Stocks You Should Love

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 very bullish technically 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.

Shake Shack

SHAK Chart SHAK data by YCharts

My first earnings short-squeeze trade idea is global restaurant player Shake Shack  (SHAK) , which is set to release numbers on Tuesday after the market close. Wall Street analysts, on average, expect Shake Shack to report revenue of $47.46 million on earnings of 7 cents per share.

The current short interest as a percentage of the float for Shake Shack is extremely high at 88.5%. That means that out of the 3.82 million shares in the tradable float, 3.38 million shares are sold short by the bears. The bears have also been increasing their bets from the last reporting period by 4.3%, or by about 140,000 shares. If the bears get caught pressing their bets into a bullish quarter, then this stock could easily rip sharply higher post-earnings as the bears move fast to cover some of their positions.

From a technical perspective, Shake Shack is currently trending above both its 50-day and 20-day moving averages, which is bullish. This stock has been uptrending a bit over the last few weeks, with shares moving higher from its low of $41 to its intraday high on Tuesday of $49.33 a share. During that uptrend, shares of Shake Shack 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 Shake Shack, 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 to $51.25 a share with high volume. Look for volume on that move that registers near or above its three-month average action of 906,446 shares. If that breakout hits post-earnings, then this stock will set up to re-test or possibly take out its next major overhead resistance levels at $55.77 to $56.69 a share, or even $60 to $65 a share.

I would simply avoid Shake Shack or look for short-biased trades if after earnings it fails to trigger that breakout and then drops back below its 20-day moving average of $44.62 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 $41 to its 52-week low of $38.64 a share.

For more on Shake Shack, check out "Shake Shack Is Quietly Building a Global Restaurant Empire."

Insys Therapeutics

INSY Chart INSY data by YCharts

Another potential earnings short-squeeze play is specialty pharmaceutical player Insys Therapeutics  (INSY) , which is set to release numbers on Thursday before the market open. Wall Street analysts, on average, expect Insys Therapeutics to report revenue $82.98 million on earnings of 23 cents per share.

The current short interest as a percentage of the float for Insys Therapeutics is extremely high at 76%. That means that out of the 24.03 million shares in the tradable float, 18.26 million shares are sold short by the bears. The bears have also been increasing their bets from the last reporting period by 8%, or by about 1.34 million shares. If the bears get caught pressing their bets into a solid quarter, then this stock could easily spike sharply higher post-earnings as the bears scramble to cover some of their positions.

From a technical perspective, Insys Therapeutics is currently trending below both its 50-day and 200-day moving averages, which is bearish. This stock has been uptrending over the last few weeks, with shares moving higher from its low of $20.15 to its recent high of $28.90 a share. During that uptrend, this stock has been making mostly higher lows and higher highs, which is bullish technical price action. That strong uptrend has now pushed shares of Insys Therapeutics within range of triggering a big breakout trade above some near-term overhead resistance levels post-earnings.

If you're in the bull camp on Insys Therapeutics, 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 $29.70 to $28.90 a share and then above its 200-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 887,232 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 $34 to $37, or even $40 a share.

I would simply avoid Insys Therapeutics or look for short-biased trades if after earnings it fails to trigger that breakout and then drops back below its 20-day moving average of $25.42 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 $22 to $20, or even its 52-week low of $17.75 a share.

Foundation Medicine

FMI Chart FMI data by YCharts

Another potential earnings short-squeeze candidate is molecular information products player Foundation Medicine  (FMI) , which is set to release numbers on Tuesday after the market close. Wall Street analysts, on average, expect Foundation Medicine to report revenue of $24.04 million on a loss of 56 cents per share.

The current short interest as a percentage of the float for Foundation Medicine is extremely high at 23.9%. That means that out of the 12.97 million shares in the tradable float, 3.10 million shares are sold short by the bears. The bears have also been increasing their bets from the last reporting period by 7.6%, or by about 219,000 shares. If the bears get caught pressing their bets into a bullish quarter, then this stock could easily rip sharply higher post-earnings as the bears rush to cover some of their positions.

From a technical perspective, Foundation Medicine is currently trending above its 50-day moving average and well below its 200-day moving average, which is neutral trendwise. This stock has been uptrending strong over the last month and change, with shares moving higher from its low of $17.51 to its recent high of $24.16 a share. During that uptrend, shares of Foundation Medicine have been consistently making higher lows and higher highs, which is bullish technical price action. That move has now pushed this stock within range of triggering a major breakout trade post-earnings.

If you're bullish on Foundation Medicine, 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 $24.16 to $25.98 a share with high volume. Look for volume on that move that hits near or above its three-month average action of 336,614 shares. If that breakout fires off post-earnings, then this stock will set up to re-fill its previous gap-down-day zone from July that started just above $30 a share.

I would avoid Foundation Medicine 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 $22.02 to $20.85 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 $18 to its 52-week low of $17.51 a share.

Financial Engines

FNGN Chart FNGN data by YCharts

Another earnings short-squeeze prospect is asset management player Financial Engines  (FNGN) , which is set to release numbers on Thursday after the market close. Wall Street analysts, on average, expect Financial Engines to report revenue of $79.42 million on earnings of 23 cents per share.

The current short interest as a percentage of the float for Financial Engines is extremely high at 23%. That means that out of 51.06 million shares in the tradable float, 11.75 million shares are sold short by the bear. If this company can deliver the earning news the bulls are looking for, then shares of Financial Engines could easily rip sharply higher post-earnings if the bears get forced to cover some of their bets.

From a technical perspective, Financial Engines is currently trending above its 50-day moving average and well below its 200-day moving average, which is neutral trendwise. This stock has been uptrending over the last month and change, with shares moving higher from its low of $28.23 to its intraday high on Tuesday of $33.85 a share. During that uptrend, shares of Financial Engines 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 major breakout trade post-earnings.

If you're bullish on Financial Engines, 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 at $34 a share with high volume. Look for volume on that move that hits near or above its three-month average volume of 419,992 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 its 200-day moving average of $38.86 to around $42 a share.

I would simply avoid Financial Engines or look for short-biased trades if after earnings it fails to trigger that breakout and then drops back below both its 20-day moving average of $31.38 to its 50-day moving average of $31.12 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 $30 to $28.58, or even its 52-week low of $28.23 a share.

TrueCar

TRUE Chart TRUE data by YCharts

My final earnings short-squeeze trading opportunity is Internet-based information player TrueCar  (TRUE) , which is set to release numbers on Thursday after the market close. Wall Street analysts, on average, expect TrueCar to report revenue of $66.21 million on a loss of 7 cents per share.

The current short interest as a percentage of the float for TrueCar is extremely high at 30%. That means that out of the 51.12 million shares in the tradable float, 15.33 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 about 1.89 million shares. If the bears get caught pressing their bets into a bullish quarter, then this stock could easily jump sharply higher post-earnings as the bears move fast to cover some of their positions.

From a technical perspective, TrueCar is currently trending above its 50-day moving average and well below its 200-day moving average, which is neutral trendwise. This stock has been trending sideways and consolidating for the last two months and change, with shares moving between $4.93 on the downside and $7.04 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 TrueCar.

If you're in the bull camp on TrueCar, 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 $6.86 to $7.04 a share and then above its gap-down-day high of $7.44 a share with high volume. Look for volume on that move that hits near or above its three-month average action of 1.18 million shares. If that breakout kicks off post-earnings, then this stock will set up to re-fill some of its previous gap-down-day zone from July that started near $11 a share.

I would avoid TrueCar 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 $5.76 to $4.93 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 52-week low of $4.01 a share.

Disclosure: 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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