NEW YORK ( TheStreet) - It's no surprise that Warren Buffett's investing conglomerate Berkshire Hathaway (BRK.A) is testing new highs just as the Dow Jones Industrial Average and S&P 500 rise to new records.
After all, with businesses spanning energy, industrials, infrastructure, financial services, media, retail and housing, Berkshire Hathaway is seen as a snapshot of Corporate America.
In the financial crisis, Buffett made a big bet on a U.S. economic rebound by way of acquisitions such Burlington Northern Santa Fe and an investment portfolio weighted heavily in financials such as Wells Fargo (WFC) -- a move that appears to be paying off in tandem with rising markets.
Berkshire Hathaway's stock performance and the conglomerate's linkage to a recovering U.S. economy certainly is something for Buffett to cheer.So why does he seem so glum? The answer may tell a story beyond Berkshire's earnings and an almost daily occurrence of new stock market highs. Notably, if markets continue to rise, Buffett is bracing for Berkshire Hathaway to underperform overall indices starting in 2013. For investors in strong-performing large caps across many sectors, dissapointment may already be sinking in. Consider that some of Berkshire's top holdings, such as Coca-Cola (KO - Get Report) and IBM (IBM - Get Report), sit slightly below record highs in 2012, amid their continued share price recovery and payoff to investors like Buffett. Were markets to drive higher this year, the likes of IBM and Coca-Cola may soon see one-year stock returns fall well below the S&P 500. As it turns out, holdings in Buffett's stock portfolio aren't alone in risking underperformance after reaching record highs in 2012, well ahead of overall indices. Starbucks (SBUX - Get Report), which hit a record high of $62 a share in April of 2012, sits nearly 10% below those highs. As 2013 progresses, the coffee roaster's one-year stock returns may turn from being a market leader to a laggard, falling behind the overall S&P 500. The same scenario holds true across many sectors and may become an issue for investors in the likes of Priceline.com (PCLN), McDonalds (MCD), Wal-Mart (WMT - Get Report), Dollar General (DG) and, most notably, Apple (AAPL - Get Report), which only started underperforming broader indices after reporting disappointing earnings in late January. While looking at share price charts is far from the entire story when assessing the outlook for companies such as Starbucks, IBM and others, the prospect that they run behind rising stock markets raises the question of whether they will fall out of investor favor through 2013. Buffett, using his preferred valuation measure, the growth in Berkshire Hathaway's book value per share, devoted a significant portion of his March 1 investor letter to warning shareholders that the company may fall behind overall indices over a five-year period. That would be a first for the 'Oracle of Omaha.' "Our relative performance, however, is almost certain to be better when the market is down or flat. In years when the market is particularly strong, expect us to fall short," wrote Buffett, in his annual letter. Still, catalysts for Berkshire to extend on its share price records may also help the likes of Starbucks and Priceline retest 2012 highs. Berkshire's shares have performed strongly since the company announced an acquisition of Heinz (HNZ), in tandem with private equity firm 3G Capital. The company's 2012 earnings benefitted from strong performance of recent acquisitions such as BNSF and Lubrizol.