Up 20% this month: Is it too late to buy Webjet Limited shares?

Credit: Steve Jurvetson

The shares of online travel agency Webjet Limited (ASX: WEB) are having yet another great day on the market. In afternoon trade its shares are higher by 3.5%, bringing its 30-day return to around 20%.

During this same period the S&P/ASX 200 (Index: ^AXJO) (ASX: XJO) has remained flat. So why has Webjet been outperforming the index?

One key catalyst for the strong performance of its shares is likely to be down to the fact that Webjet was added into the S&P/ASX 200 index at this month’s quarterly rebalance. Webjet was one of six shares added to the index after the quarterly review.

Because some fund managers are restricted from buying shares outside the S&P/ASX 200 index, Webjet’s inclusion in the index means that Webjet is now on the radar of these powerful asset managers. They are likely buying its stock.

And why would they not want to? This is a company that is not only growing at a rapid clip, but also has strong tailwinds supporting growth. Last month Webjet delivered a 30% increase in full year revenue to $154.5 million and a 27% jump in net profit to $22.2 million.

According to management the ongoing acceleration of bookings shifting online led to its bookings growth outperforming the industry average by more than five times. Great news for online travel agencies, but not necessarily great for those with prominent bricks-and-mortar presences such as Helloworld Ltd (ASX: HLO) and Flight Centre Travel Group Ltd (ASX: FLT).

Whilst I expect Flight Centre will fight back strongly with its online offering, for now Webjet appears to be the dominant force online in Australia. For this reason I think it is positioned perfectly to maintain its strong earnings growth for a number of years to come.

Despite the rapid rise in Webjet’s share price this year I still feel it is a long-term buy and hold investment option. At 28x estimated FY 2017 earnings according to CommSec, I believe its growth prospects justify the premium.

Investors could wait for a pull back in its shares, but it’s worth considering that there’s no guarantee one will occur.

If you need to make room in your portfolio for Webjet I would suggest taking a look to see if you own these wealth destroying shares. Each could be holding your portfolio back and might be best swapped out if you ask me.

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Motley Fool contributor James Mickleboro has no position in any stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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