Is GlaxoSmithKline Poised to Head Higher?

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 healthcare group engaged in the discovery, development, manufacturing, and marketing of pharmaceutical products. These products are vaccines, over-the-counter medicines, and health-related consumer products. GlaxoSmithKline’s principal pharmaceutical products are 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.

GlaxoSmithKline, the UK drugmaker, will press ahead with its big bet on emerging markets, despite turmoil in its scandal-hit Chinese business and volatility in developing economies. Sir Andrew Witty, chief executive, admitted there could be some short-term challenges ahead after recent market turbulence from Argentina to Turkey. But he insisted GSK’s heavy investment in the developing world would still pay off as rising incomes and growing populations increase demand for healthcare. “We’re prepared to take the short-run ups and downs to stay committed for the long-run direction of travel,” Sir Andrew said.

T = Technicals on the Stock Chart Are Strong

GlaxoSmithKline stock has trended higher in the past several years. The stock is currently surging higher and looks poised to continue. 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 below its rising key averages which signal neutral to bearish 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

20.25%

83%

80%

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

Put IV Skew

Call IV Skew

March Options

Steep

Average

April Options

Steep

Average

As of today, there is an average demand from call buyers or sellers and high demand by put buyers or low demand by put sellers, all neutral to bearish over the next two months. To summarize, investors are buying a very significant amount of call and put option contracts and are leaning neutral to bearish 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 Increasing 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 Q4

2013 Q3

2013 Q2

2013 Q1

Earnings Growth (Y-O-Y)

111.07%

-12.65%

-66.67%

-28.21%

Revenue Growth (Y-O-Y)

270.39%

-1.86%

-34.80%

-7.20%

Earnings Reaction

1.55%*

-0.11%

0.38%

0.01%

GlaxoSmithKline has seen rising earnings and revenue figures over the last four quarters. From these numbers, the markets have been optimistic about GlaxoSmithKline’s recent earnings announcements.

P = Weak 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

-3.24%

0.59%

6.93%

-2.29%

1.49%

GlaxoSmithKline has been a poor relative performer, year-to-date.

Conclusion

GlaxoSmithKline is a healthcare group that engages in many aspects of the pharmaceutical business around the world. The company will press ahead with its big bet on emerging markets. The stock has trended higher in recent years. Over the past four quarters, investors have been optimistic, as earnings and revenue figures have been on the rise. Relative to its peers and sector, GlaxoSmithKline has been a poor year-to-date performer. Look for GlaxoSmithKline to OUTPERFORM.

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