Can GlaxoSmithKline Break Higher?

With shares of GlaxoSmithKline (NYSE:GSK) trading around $52, is GSK an OUTPERFORM, WAIT AND SEE or STAY AWAY? Let’s analyze the stock with the relevant sections of our CHEAT SHEET investing framework:

T = Trends for a Stock’s Movement

GlaxoSmithKline is global health care group engaged in the discovery, development, manufacturing, and marketing of pharmaceutical products. These products include vaccines, over-the-counter medicines, and health-related consumer products. GlaxoSmithKline’s principal pharmaceutical products include medicines in these areas: respiratory, antivirals, central nervous system, cardiovascular and urogenital, metabolic, antibacterials, oncology and emesis, dermatology, rare diseases, immuno-inflammation, vaccines, and HIV.

The company operates in three primary areas of business: pharmaceuticals, vaccines, and consumer health care. Through its areas of business, GlaxoSmithKline is able to positively affect the lives of many consumers around the world that require their medications.

T = Technicals on the Stock Chart are Strong

GlaxoSmithKline stock been on a strong run in recent years. The stock has whipsawed a bit but looks to be getting ready to test 52-week highs. Analyzing the price trend and its strength can be done by using key simple moving averages.

What are the key moving averages? They are the 50-day (pink), 100-day (blue), and 200-day (yellow) simple moving averages. As seen in the daily price chart below, GlaxoSmithKline is trading above its rising key averages, which signal neutral to bullish price action in the near-term.

GSK

(Source: Thinkorswim)

Taking a look at the implied volatility (red) and implied volatility skew levels of GlaxoSmithKline options may help determine if investors are bullish, neutral, or bearish.

Implied Volatility (IV)

30-Day IV Percentile

90-Day IV Percentile

GlaxoSmithKline Options

17.35%

3%

0%

What does this mean? This means that investors or traders are buying a very small amount of call and put options contracts, compared to the last 30 and 90 trading days.

Put IV Skew

Call IV Skew

August Options

Flat

Average

September Options

Flat

Average

As of today, there is average demand from call buyers or sellers, and low demand by put buyers or high demand by put sellers, all neutral to bullish over the next two months. To summarize, investors are buying a very small amount of call and put option contracts, and are leaning neutral to bullish over the next two months.

On the next page, let’s take a look at earnings and revenue growth rates, and what that means for Glaxo’s stock.

E = Earnings Are Decreasing Quarter-Over-Quarter

Rising stock prices are often strongly correlated with rising earnings and revenue growth rates. The last four quarterly earnings announcement reactions can also help gauge investor sentiment on GlaxoSmithKline’s stock. What do the last four quarterly earnings and revenue growth (Y-O-Y) figures for GlaxoSmithKline look like, and more importantly, how did the markets like these numbers?

2013 Q1

2012 Q4

2012 Q3

2012 Q2

Earnings Growth (Y-O-Y)

-28.21%

-26.92%

-15.12%

12.86%

Revenue Growth (Y-O-Y)

-7.20%

-1.91%

-6.99%

-6.76%

Earnings Reaction

0.01%

0.73%

-0.99%

-1.21%

GlaxoSmithKline has seen decreasing earnings and revenue figures over most of the last four quarters. From these numbers, it seems the markets have had mixed feelings about GlaxoSmithKline’s recent earnings announcements.

P = Excellent Relative Performance Versus Peers and Sector

How has GlaxoSmithKline stock done relative to its peers, Pfizer (NYSE:PFE), Merck (NYSE:MRK), Novartis (NYSE:NVS), and the overall sector?

GlaxoSmithKline

Pfizer

Merck

Novartis

Sector

Year-to-Date Return

21.56%

14.36%

18.32%

15.97%

16.73%

GlaxoSmithKline has been a relative performance leader, year-to-date.

Conclusion

GlaxoSmithKline is a health care group that engages in many aspects of pharmaceutical business around the world. The stock has been trending higher over the last few years, and is now trading near 52-week highs. Over the last four quarters, earnings and revenue figures have been declining, which has produced mixed feelings among investors. Relative to its peers and sector, GlaxoSmithKline has been a year-to-date performance leader. Look for GlaxoSmithKline to OUTPERFORM.

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