Should You Take a Chance With GlaxoSmithKline?

With shares of GlaxoSmithKline (NYSE:GSK) trading around $54, 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.

Peter Humphrey had not expected to be caught in the glare of a television camera from China Central Television, the state broadcaster, when he was escorted last August into a small room in a Shanghai detention centre. Humphrey, a British private investigator hired by GlaxoSmithKline to investigate whether a former Chinese employee was waging a smear campaign against the company, was asked to read a confession into what he was told would be a small police interrogation camera, according to people familiar with his case. Police informed him that it would help his situation. A month earlier Humphrey and Yu Yingzeng, his American wife and business partner, had been arrested on charges of illegally purchasing private information and operating an illegal business. Handcuffed and wearing an orange prison vest, Humphrey instead found himself recording a confession that would later be broadcast across the country. “He had no choice but to say what he had been told to say in front of a big camera instead of a small one,” said one person familiar with the trap. “He was extremely upset about it afterwards and the British government complained.” Shanghai police declined to comment.

Almost a year to the day after they were first detained, Humphrey and Yu’s situation has not improved, although they now face only one charge of illegally obtaining private information. On Wednesday, Chinese authorities informed U.S. consular authorities that the couple would be tried next month in secret, in a hearing closed to their family members and foreign diplomats. The U.S. embassy in Beijing said on Friday it was “concerned” that the trial would be closed, adding that diplomatic access to such hearings is guaranteed under a Sino-US treaty. The U.K. government said it had sought to make sure “judicial process is followed in a fair way in line with international law.” Just days earlier, GSK confirmed for the first time that it asked Humphrey and Yu in April 2013 to establish who had planted a clandestine video camera in the bedroom of Mark Reilly, the U.K. pharmaceutical company’s former China head. Reilly faces possible prosecution in the country on corruption charges. GSK also wanted the couple to establish whether its former China government relations director had orchestrated an alleged email “smear campaign,” in which an anonymous whistleblower told regulators that fraudulent practices were rife at the company.

T = Technicals on the Stock Chart are Strong

GlaxoSmithKline stock has trended higher in the past couple of years. The stock is currently surging higher and looks set 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 between its rising key averages which signal neutral 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

15.91%

76%

74%

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

August Options

Average

Average

September Options

Average

Average

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

On the next page, let’s take a look at the earnings and revenue growth rates and the conclusion.