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Berkshire or Rail Volume: Which Is King?

NEW YORK ( TheStreet) -- Pop-quiz, hotshot: Which is more important to the short-term fortunes of railroad stocks, rail volume data or Warren Buffett?

To many sector watchers, there is no debate; the primacy of rail volume data is irrefutable. But it's a testament to the power of Berkshire Hathaway's (BRK.A - Get Report)acquisition of Burlington Northern (BNI) that it may have derailed convention long-term sector wisdom -- at least temporarily.

Indeed, even though the November acquisition had an immediate and potentially negative secondary impact -- some institutional investors will be forced to divest Berkshire holdings once Burlington's stock is folded within it -- buy-and-hold railroad investors received a big wish in the form of a big boost to the railroad industry. Reinvestment is likely to come in the true railroad stocks left on the landscape, anyway, stocks which investors also hope will benefit from Buffett's bet.

Be careful what you wish for, though: the law of unintended (market) consequences has resulted in fears of mini-bubbles in the rail sector being triggered by Buffett's bet, as outlined in a UBS Investment Research report on the market reaction to Berkshire Hathaway's three major moves related to Burlington.

While the UBS report argues that momentum investing in the stodgy railroad sector led investors to price levels beyond what the fundamentals were able to justify, some of the leading institutional investors respectfully disagree. Even as they accept the empirical nature of the UBS data, they just don't agree with the conclusions reached about Warren Buffett's ability to inflate -- and deflate -- the sector .

Rick Paterson, the UBS analyst in charge of the research, said the team spoke with a range of institutional investors after it released the report, and there was definitely a divide in the reaction. "Most of my institutional clients read it, and a lot were surprised by the analysis and tended to agree, as it triggered their memory around these events. About 40% were not in agreement," Paterson said.
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