Can GlaxoSmithKline Recover?

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 says it has launched an investigation into allegations that it hired state-employed doctors in Iraq as paid sales representatives. The pharmaceuticals giant said Monday it is probing whether there has been any “improper conduct” in its Iraq business. It was responding to claims from a whistleblower, published in The Wall Street Journal, that it paid for 16 doctors and pharmacists in Iraq as its representatives while they continued working for the government. GSK has separately been embroiled in a major bribery probe in China, where authorities allege that four of its employees paid for doctors and hospitals to prescribe its drugs. The new claims in Iraq date back to 2012, and reportedly came from a person familiar with the company’s Middle East operations.

T = Technicals on the Stock Chart Are Weak

GlaxoSmithKline stock has trended higher in the past several years. However, the stock is currently pulling back and may need time to stabilize before heading higher. 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 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

18.74%

96%

94%

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

May Options

Steep

Average

June 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 bullish 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 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 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%

-34.8%

-7.2%

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 had conflicting feelings 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

-3.15%

1.81%

11.31%

2.71%

4.17%

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 says it has launched an investigation into allegations that it hired state-employed doctors in Iraq as paid sales representatives. The stock has trended higher in recent years but is currently pulling back. Over the past four quarters, earnings and revenue figures have been on the rise. However, investors have had conflicting feelings about recent earnings announcements. Relative to its peers and sector, GlaxoSmithKline has been a poor year-to-date performer. WAIT AND SEE what GlaxoSmithKline does next.

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