(The following column by Jonathan Ratner appeared on the Financial Post website on November 24, 2009.)
OTTAWA — The railroad industry has outperformed the S&P 500 by 10% since Berkshire Hathaway Inc. announced its acquisition of Burlington Northern Santa Fe Corp. (BNI) on November 3. This marks the third period of outperformance on the back of significant investments by Warren Buffett in the sector.
The first was when new broke of his initial 11% stake in BNI in April 2007. The next time came when Mr. Buffet boosted his stake above 15% in October of that year. The third occurrence came after Berkshire recently announced its intention to acquire 100% of the company.
While rail stocks outperformed the S&P by 9%, 4% and 10%, respectively, in these cases, investors should know that the stocks quickly gave back half of those relative gains on the back of the first two of these “Buffett bubbles,” according to analysts at UBS. As a result, they warn that the railroad industry could underperform between now and the end of 2009 if some of the Buffett-inspired enthusiasm for the group begins to wane.
UBS remains overweight the rail group with its top picks as CSX Corp. and Canadian National Railway Co. However, the recent rally triggered a downgrade of Union Pacific Corp. as it is now considered the most expensive name in the group (excluding Kansas City Southern). Union Pacific has also been the biggest outperformer since the BNI deal was announced, so it has the most to lose if this bubble bursts.
According to Berkshire’s latest filing, it owned more than 9.5 million shares of Union Pacific, or almost 2% of the company. It also held roughly 1.9 million shares of Norfolk Southern Corp., or 0.5% of the company’s shares outstanding. However, Mr. Buffett and his holding company are expected to sell both of these holdings before the Burlington Northern deal is completed.