Can GlaxoSmithKline Get Past This Hiccup and Head Higher?

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With shares of GlaxoSmithKline (NYSE:GSK) trading around $51, is the stock 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 creation and discovery, development, manufacture, and marketing of pharmaceutical products, including 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 Mixed

GlaxoSmithKline stock has been coasting higher over the past several years. The stock is now pulling back a bit after breaking higher earlier this year. Analyzing the price trend and its strength can be done using key simple moving averages. What are the key moving averages? 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 between its key averages, which signals neutral price action in the near term.

GSK

(Source: Thinkorswim)

Taking a look at the implied volatility 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

19.21%

30%

27%

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

Put IV Skew

Call IV Skew

July Options

Flat

Average

August Options

Flat

Average

As of today, there is an 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 minimal amount of call and put option contracts and are leaning neutral to bullish over the next two months.

E = Earnings are Decreasing Quarter-Over-Quarter

Rising stock prices are often strongly correlated with rising earnings and revenue growth rates. Also, the last four quarterly earnings announcement reactions help gauge investor sentiment on GlaxoSmithKline’s stock. What do the last four quarterly earnings and year-over-year revenue growth 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 the past four quarters. From these numbers, 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, Merck (NYSE:MRK), Novartis (NYSE:NVS), Pfizer (NYSE:PFE), and sector?

GlaxoSmithKline

Merck

Novartis

Pfizer

Sector

Year-to-Date Return

18.29%

16.29%

12.26%

12.36%

14.81%

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

Conclusion

GlaxoSmithKline is involved in the discovery and development of pharmaceutical drugs that tackle many known health care problems. The stock has been steadily trading higher but is now pulling back a bit as gains are being digested. Over the past four quarters, investors in the company have had mixed feelings about earnings announcements since earnings and revenue figures have declined. Relative to its peers and sector, GlaxoSmithKline has been a year-to-date performance leader. WAIT AND SEE what GlaxoSmithKline does in coming quarters.

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