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Brand Face-Off: GlaxoSmithKline plc (ADR) vs. Merck & Co., Inc.

Evaluating GSK and MRK from technical and sentiment viewpoints

by 4/7/2014 3:18:48 PM
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Pharmaceutical giants GlaxoSmithKline plc (ADR) (NYSE:GSK) and Merck & Co., Inc. (NYSE:MRK) have charted different paths during the last year. GSK sports an annual gain of just over 10%, and is off nearly 4% in 2014 to trade at $51.53. In fact, since hitting a multi-year high of $56.73 in mid-February, the shares have shed about 9%, pressured lower in recent weeks by their descending 20-day moving average. In today's session, the equity is off roughly 1% amid reports GSK is investigating potentially improper conduct among its staff in Iraq.

Meanwhile, MRK is up 10.5% year-to-date and more than 23% year-over-year, in addition to outpacing the broader S&P 500 Index (SPX) by close to 12 percentage points during the past three months. At last check, the stock was resting at $55.31.

Daily Chart of GSK since February 2014 With 20-Day Moving Average

Daily Chart of MRK since November 2013

On the sentiment front, however, GlaxoSmithKline is the recipient of greater bullish attention. Schaeffer's put/call open interest ratio (SOIR) on the equity checks in at 0.56, with call open interest nearly doubling put open interest among options expiring in the next three months. What's more, this ratio is lower than 62% of similar readings from the previous 12 months, conveying short-term option traders have been more call-focused than usual recently. If these traders begin to unwind their bullish bets, the stock could run into contrarian headwinds.

In addition, the brokerage bunch is expecting big things from GSK. Right now, the stock's consensus 12-month price target is $61.13, nearly 19% higher than the current share price. In other words, GlaxoSmithKline may get hit with a round of price-target reductions, should it continue to struggle on the charts.

By contrast, despite MRK's technical strength, the equity remains a victim of bearish speculation. On the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX), the shares have racked up a 50-day put/call volume ratio of 0.49, which is just 6 percentage points from a 52-week pessimistic peak. Furthermore, Merck's SOIR of 1.12 is higher than 88% of comparable readings from the last year, meaning short-term traders have rarely been so fixated on puts, relative to calls. If these bears change their tune, it could add contrarian fuel to the pharmaceutical stock's fire.

On a similar note, nearly half of the 13 brokerage firms covering MRK assign it a tepid "hold" rating. Plus, the security's consensus price target of $56.78 is just 2.7% from its current perch. In other words, a series of analyst upgrades and/or price-target hikes could be in line, helping to power the shares further north.

All things considered, Merck & Co., Inc. (NYSE:MRK) is the clear-cut winner of this Brand Face-Off. Not only are its technicals superior to those of GlaxoSmithKline plc (ADR) (NYSE:GSK), but also, it has much more potential to benefit from a potential unwinding in skepticism, both in the options pits and on the Street.

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