Why Webjet Limited and BlueScope Steel Limited were added to UBS' model portfolio

UBS thinks the path of least resistance for the S&P/ASX 200 (Index:^AXJO) (ASX:XJO) is up and that Webjet Limited (ASX:WEB) and BlueScope Steel Limited (ASX:BSL) will help lead the charge!

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The market can best be described as being torn in different directions with the reasonably upbeat reporting season offset by fears of a global trade war and a spike in bond yields.

It's primarily fears of a trade war between China and the US following the resignation of president Donald Trump's pro-trade economic advisor Gary Cohn that was behind Wednesday's 1% drop in the S&P/ASX 200 (Index:^AXJO) (ASX:XJO) to 5,902 points.

The good news is that UBS thinks the tug-of-war will be won by the bulls and that the top 200 index will finish the year up around 6.3% from here to 6,275 points. Once you add in dividends, total returns for investors should just about touch 10%.

Just be prepared for a more volatile ride compared to the perfect calm of 2017!

Of course, your chance of beating the index increases if you pick the right stocks. From this perspective, it is worth noting that UBS has added travel website operator Webjet Limited (ASX: WEB) and steel products maker BlueScope Steel Limited (ASX: BSL) to its model portfolio.

Webjet had delivered a market-beating first half result last month that has triggered a surge in its share price.

The stock still has plenty of room to climb as it is underperforming its peers like Flight Centre Travel Group Ltd (ASX: FLT) and Helloworld Travel Ltd (ASX: HLO), which have rallied 95% and 20% over the past year when Webjet is only up by 8%.

Not only did Webjet post very robust organic growth in total transaction value (TTV), it did so without sacrificing divisional TTV margin.

UBS is forecasting earnings per share (EPS) to grow by a compound annual growth rate (CAGR) of 17% over the next three years.

That puts the stock on a compelling valuation as Webjet is trading on a price-earnings (P/E) multiple of around 18.5 times. That's arguably too low given its profit growth profile.

BlueScope has also posted a very strong half year result in February that was 7% ahead of the broker's estimates.

"We think the under-appreciation of the ASEAN downstream business and the value of diversification will see BlueScope eventually trade ahead of steel peers," said UBS.

"BlueScope is trading on 6.0x FY18E EV/EBITDA [enterprise value to earnings before interest, tax, depreciation and amortisation] vs the global steel average of 6.8x. BSL is guiding a 25% H/H lift in underlying EBIT; we are forecasting in line with guidance."

These aren't the only stocks that are well placed to outperform in 2018 in spite of the increased market volatility.

The experts at the Motley Fool have picked three "disruptors" that they expect will deliver solid earnings growth in the years ahead.

Click on the free link below to find out what these stocks are and why they should be on your radar.

Motley Fool contributor Brendon Lau has no position in any of the stocks mentioned. The Motley Fool Australia owns shares of and has recommended Flight Centre Travel Group Limited. The Motley Fool Australia owns shares of Helloworld Limited. The Motley Fool Australia has recommended Webjet Ltd. 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 Scott Phillips.

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