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5 Earnings Stocks the Bears Love to Hate

Hannelore Foerster | Bloomberg | Getty Images

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 The 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.

Guess

My first earnings short-squeeze trade is designer, marketer, distributor and licenser of apparel for men, women and children Guess, which is set to release numbers on Wednesday after the market close. Wall Street analysts, on average, expect Guess to report revenue of $785.57 million on earnings of 87 cents per share.

The current short interest as a percentage of the float for Guess is very high at 16.7 percent. That means that out of the 59.69 million shares in the tradable float, 9.89 million shares are sold short by the bears. The bears have also been increasing their bets from the last reporting period by 21.2 percent, or by about 1.72 million shares. If the bears are caught pressing their bets too aggressively into a bullish quarter, then we could easily a sharp move higher for shares of Guess post-earnings.

From a technical perspective, Guess' stock is currently trending above both its 50-day and 200-day moving averages, which is bullish. This stock recently sold off from its high of $29.28 to its low of $26.70 a share. Shares of Guess have started to rebound off that $26.70 low and are moving back above its 50-day moving average of $27.23 a share. That move is quickly pushing shares of Guess within range of triggering a near-term breakout trade post-earnings.

If you're bullish on Guess, 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 $27.50 a share with high volume. Look for volume on that move that hits near or above its three-month average action of 1.14 million shares. If that breakout triggers, then Guess will set up to re-test or possibly take out its next major overhead resistance levels at $28.80 to $29.28 a share. Any high-volume move above those levels will then give Guessa chance to re-fill some of its previous gap down zone from last September that started at $32.

I would avoid Guess 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 $26.70 to $25.75 a share with high volume. If we get that move, then Guess will set up to re-test or possibly take out its next major support levels at $24 to $23 a share.

FactSet Research Systems

Another potential earnings short-squeeze trade is provider of integrated financial information and analytical applications to the investment community FactSet Research Systems, which is set to release its numbers on Tuesday before the market open. Wall Street analysts, on average, expect FactSet Research Systems to report revenue of $213.31 million on earnings of $1.11 per share.

Just recently, UBS said FactSet's share price performance shows positive headcount trends along with a better pricing environment. The firm thinks that a lower-than-expected ASV increase from U.S. investment management repricing or weaker user growth has the ability to cause a third-quarter guidance miss. The firm has a neutral rating on the stock.

The current short interest as a percentage of the float for FactSet Research Systems is notable at 11.8 percent. That means that out of the 40.94 million shares in the tradable float, 4.86 million shares are sold short by the bears. If the bulls get the earnings news they're looking for, then shares of FactSet could rip higher post-earnings.

From a technical perspective, FactSet is currently trending below both its 50-day and 200-day moving averages, which is bearish. This stock has been uptrending strong for the last three months, with shares moving higher from its low of $86.60 to its recent high of $101.05 a share. During that uptrend, shares of FactSet have been consistently making higher lows and higher highs, which is bullish technical price action. That move has now pushed shares of FactSet within range of triggering a near-term breakout trade post-earnings.

If you're in the bull camp on FactSet, 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 $101.05 a share with high volume. Look for volume on that move that registers near or above its three-month average action of 450,959 shares. If that breakout triggers, then FactSet will set up to re-test or possibly take out its next major overhead resistance levels at $104.13 to $108.12 a share.

I would avoid FactSet 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 $95.70 to its 200-day moving average at $93.48 a share with high volume. If we get that move, then FactSet will set up to re-test or possibly take out its next major support levels at $90 to $88 a share.

Pacific Sunwear of California

One potential earnings short-squeeze candidate is operator of mall-based beachwear retail stores Pacific Sunwear of California, which is set to release numbers on Wednesday after the market close. Wall Street analysts, on average, expect Pacific Sunwear of California to report revenue of $227.86 million on a loss of 16 cents per share.

Just recently, DA Davidson upgraded this stock to buy from neutral, citing an improved merchandising mix and potential acceleration in same-store sales. The firm also raised its price target on shares of Pacific Sunwear to $3.50 from $2.20 a share.

The current short interest as a percentage of the float for Pacific Sunwear of California is pretty high at 12.8 percent. That means that out of the 30.53 million shares in the tradable float, 5.73 million shares are sold short by the bears. If this company can deliver the earnings news the bulls are looking for, then we could easily see a large short-squeeze develop post-earnings.

From a technical perspective, Pacific Sunwear's stock 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 three months, with shares moving higher from its low of $1.36 to its recent high of $2.58 a share. During that uptrend, shares of Pacific Sunwear have been consistently making higher lows and higher highs, which is bullish technical price action. That move has now pushed shares of Pacific Sunwear within range of triggering a near-term breakout trade post-earnings.

If you're bullish on Pacific Sunwear, 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 $2.58 to $2.73 a share and then once it moves above some past resistance at $3.16 a share with high volume. Look for volume on that move that hits near or above its three-month average action of 219,800 shares. If that breakout triggers, then Pacific Sunwear will set up to re-test or possibly take out its next major overhead resistance levels at $4.06 to $4.50 a share.

Francesca's

Another earnings short-squeeze prospect is specialty retailer Francesca's, which is set to release numbers on Tuesday after the market close. Wall Street analysts, on average, expect Francesca's to report revenue of $84.92 million on earnings of 30 cents per share.

The current short interest as a percentage of the float for Francesca's is extremely high at 45.6 percent. That means that out of the 34.79 million shares in the tradable float, 15.86 million shares are sold short by the bears. This is a stock with a very high short interest and a relatively low tradable float. Any bullish earnings news could spark a monster short-squeeze for shares of Francesca's post-earnings.

From a technical perspective, Francesca's is currently trending below both its 50-day and 200-day moving averages, which is bearish. This stock has been trending sideways for the last month and change, with shares moving between $24 on the downside and $28.46 on the upside. A high-volume move above the upper-end of its recent range could trigger a near-term breakout trade for shares of Francesca's post-earnings.

If you're bullish on Francesca's, 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 $27.16 to $28.46 a share and then once it clears more resistance at $29.25 to $29.79 a share with high volume. Look for volume on that move that registers near or above its three-month average action of 950,244 shares. If that breakout triggers, then Francesca's will set up to re-test or possibly take out its next major overhead resistance levels at $32 to $34 a share.

I would avoid Francesca's 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 $26 to $23.92 a share with high volume. If we get that move, then Francesca's will set up to re-test or possibly take out its next major support levels at $22.31 to its 52-week low at $20.93 a share.

Towerstream

My final earnings short-squeeze trade idea is broadband services provider Towerstream which is set to release numbers on Monday after the market close. Wall Street analysts, on average, expect Towerstream to report revenue of $8.18 million on a loss of 11 cents per share.

If you're looking for a stock with a decent short interest that's been beaten down heading into its earnings report this week, then make sure to check out shares of Towerstream. This stock has dropped sharply over the last six months, with shares off by 29 percent.

The current short interest as a percentage of the float for Towerstream is rather high at 12.1 percent. That means that out of the 50.61 million shares in the tradable float, 7.24 million shares are sold short by the bears. If the bulls get the earnings news they're looking for, then shares of Towerstream could easily see a sharp short-squeeze post-earnings.

From a technical perspective, Towerstream is currently trending below both its 50-day and 200-day moving averages, which is bearish. This stock has been downtrending for the last three months, with shares dropping from its high of $3.92 to its recent low of $2.42 a share. During that downtrend, shares of Towerstream have been consistently making lower highs and lower lows, which is bearish technical price action. That said, shares of Towerstream have recently started to rebound off that $2.42 low and quickly move within range of triggering a near-term breakout trade post-earnings.

If you're in the bull camp on Towerstream, 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 $3.05 to $3.07 a share with high volume. Look for volume on that move that hits near or above its three-month average volume of 475,108 shares. If that breakout triggers, then Towerstream will set up to re-test or possibly take out its next major overhead resistance levels at $3.46 to its 200-day moving average at $3.53 a share. Any high-volume move above $3.53 will then put $3.92 to $3.98 into range for shares of Towerstream.

By TheStreet.com Contributor Roberto Pedone

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Disclosures:

At the time of publication, Roberto Pedone had no positions in stocks mentioned.

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Disclaimer

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