Does GlaxoSmithKline Stock Support Rising Prices?

With shares of GlaxoSmithKline (NYSE:GSK) trading around $51, 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.

Recently, GlaxoSmithKline settled a suit in the United States over the company’s marketing practices for its diabetes drug Avandia. The drug has been linked to heart problems and has been banned in Europe and heavily restricted in the United States. The company is still involved in a bribery scandal related to the company’s operations in China. However, GlaxoSmithKline delivered earnings and revenue figures on Wednesday that beat Wall Street’s expectations.

T = Technicals on the Stock Chart are Strong

GlaxoSmithKline stock has been steadily rising over the last several years. The stock is now trading near price levels not seen since the mid-2000s. 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 slightly 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

17.56%

16%

13%

What does this mean? This means that investors or traders are buying a small amount of call and put options contracts, as 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 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 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 the earnings and revenue growth rates and the conclusion.

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 revenue growth (Y-O-Y) figures for GlaxoSmithKline look like and more importantly, how did the markets like these numbers?

2013 Q2

2013 Q1

2012 Q4

2012 Q3

Earnings Growth (Y-O-Y)

-66.67%

-28.21%

-26.92%

-15.12%

Revenue Growth (Y-O-Y)

-34.80%

-7.20%

-1.91%

-6.99%

Earnings Reaction

0.38%

0.01%

0.73%

-0.99%

GlaxoSmithKline has seen decreasing earnings and revenue figures over the last four quarters. From these numbers, the markets have been pleased with 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 sector?

GlaxoSmithKline

Pfizer

Merck

Novartis

Sector

Year-to-Date Return

19.09%

16.03%

17.05%

13.79%

14.78%

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 company has been linked to some positive and negative news in the last several weeks. The stock is now trading at prices not seen since the mid-2000s. Over the last four quarters, earnings and revenue figures have been decreasing, however, investors have been pleased with what they have heard during earnings announcements. Relative to its peers and sector, GlaxoSmithKline has been a year-to-date performance leader. WAIT AND SEE what GlaxoSmithKline does this coming quarter.

Using a solid investing framework such as this can help improve your stock-picking skills. Don’t waste another minute — click here and get our CHEAT SHEET stock picks now.

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