Cramer: Citigroup, Capital One are 'horrendous shorts'

Wall Street has been too bearish on several key financial stocks this quarter, CNBC's Jim Cramer said, and short sellers are the latest victims of these "horrendous" trades.

"There were a lot of people who were betting against this quarter," Cramer said on "Squawk on the Street" Monday. Instead, he called Citigroup's latest earnings report "superb," asking "how do you stay short?"

Citigroup reported a stronger-than-expected 26 percent rise in adjusted quarterly profit as stronger home prices reduced losses on mortgages and trading revenue rebounded.

Adjusted net income rose to $3.89 billion, or $1.25 per share, in the second quarter, from $3.08 billion, or $1.00 per share, a year earlier.

(Read More: Citigroup earnings, revenue top expectations)

Cramer said that Citigroup's business looks "really terrific" when broken down by region. He also reminded investors that the company is a global bank, not just an American bank, which makes it a good way to bet on emerging market growth.

Cramer also dismissed the idea that macro headwinds in emerging markets will significantly affect the company's prospects for growth. "Revenue was just been terrific" in those areas for Citigroup, he said. "If people really want to go back to emerging markets, Citi is go-to."

(Related: JPMorgan's Dimon on the American economy, stocks)

Citigroup has become a more lean organization and Cramer said he'd like the company even more when their legal fees begin to go down.

He pointed out that the financial sector in general has been underloved by the markets. "What I think is most interesting is that Wells Fargo wasn't supposed to be so great on Friday. It was magnificent," he said. "We now have three banks that have reported—all better than expected—it's verifying the run."

(Related: Goldman says equities are the only place to be)

After strong earnings from other banks, Cramer said that investors will be "tempted" to buy stocks like Goldman Sachs and Capital One, keeping in mind that each company has different strengths. Goldman does well with foreign currencies and playing the yield curve, while Capital One is strongest in its credit card business.

"The two [stocks] that people were betting against were Citi and Capital One. They turned out to be horrendous shorts. Very good longs," he said.

Cramer added that markets had once left Citigroup "for dead," but "it turns out that they have much more earnings power than I thought."

"I think [Citi CEO Michael] Corbat is doing a good job," he said.

—By CNBC's Paul Toscano. Follow him on Twitter and get the latest stories from "Squawk on the Street" @ToscanoPaul.

Reuters contributed to this report.

Jim Cramer's Charitable Trust owns shares of Wells Fargo