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.

Some institutions simply chalked it up to a market coincidence. Other institutions had already stopped adding to railroad positions -- sometimes called a stealth sale position.

The most negative reaction came from holders of Union Pacific ( UNP - Get Report) shares. UBS downgraded Union Pacific as a result of its research, citing fears that the stock had become too expensive.

The railroad companies, of course, also place the blinders on when it comes to any short-term negative market movement, especially when that analysis precipitated a downgrade in their own stock.

"Generally speaking, Union Pacific's stock price has outperformed the broader market for more than three years ... we view Berkshire Hathaway's decision to purchase all of the outstanding shares of BNSF Railway as a tremendous vote of confidence in the future of America's freight rail industry," a Union Pacific spokeswoman said when asked about the UBS report.

And she may, in fact, be correct in her assessment. Union Pacific is far from alone in viewing the long-term outlook for rails as positive. Notably, UBS Paterson is among those who agree with that outlook, even if the bubble analysis led him to downgrade Union Pacific stock.

Longbow Research rail analyst Lee Klaskow said from the long-term perspective that Buffett's buy actually reduces volatility in the sector, though he also conceded that in the short-term, a move by Buffett that strengthens stocks would lead some investors to consider if it was worth selling the stock from a position of strength.

The most direct and spirited attack on the UBS data, however, comes from institutional investors who believe that changes in rail volume can explain away any notions that the rail sector grows or contracts -- at least in the short-term -- on the investment whims of the Oracle of Omaha.

"I can't argue with the data that UBS has for the history of Buffett's moves," said Nathan Brown, an investment analyst at Waddell & Reed. "I can't argue with what happened to the stocks. I just argue that weekly rail volume data is a more likely cause," Brown said. He noted that rail volume data worsened at several points in time linked to the Buffett stake increases in Burlington, and the subsequent weakness in the stocks can be attributed to the weakness in the rail volume numbers. "That's the more important force," Brown said.

UBS' Paterson says while volumes do matter, the UBS data is really a separate data animal: "All we are saying is that for a few days immediately following the Buffett's investments, out to a few weeks following the moves, the valuation of these things become frothy."

Indeed, rail volumes, while clearly a driver of stock performance, can't explain away mini-bubbles in stocks that occur within a time frame of days. "I don't disagree about the importance of rail volume, and I'm not saying that rails have outperformed for the last six months because of these three Buffett-inspired events, but volumes move in a more gradual pattern, over months," Paterson argued.

In the end, both those supporting the mini-bubble argument and those opposing it have reached a similar long-term conclusion about the rail sector outlook. "These stocks are a little ahead of themselves given the bubble we talked about, but on a one-year to two-year basis, we like the group," Paterson said.

Waddell & Reed's Brown noted that the investor analyzes rail volume on a sequential basis, and saw the largest sequential increase in rail volume between the second and third quarter. "That would suggest that we have already seen the baseline of recovery in the sector, and anything further is upside to those numbers."

-- Reported by Eric Rosenbaum in New York.


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