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It was a hot time on Wall Street in 1997. But it was even hotter for Buffalo-area stocks.

For the second straight year, the stocks of locally based companies fared far better than the major market indexes and turned in their best year since 1985 by posting a 40 percent gain.

Last year's gain even topped the 38.8 percent return that the local stocks posted in 1996, giving the Buffalo Portfolio an unprecedented third straight year of annual gains that have exceeded 29 percent. Over that period, the local stocks have gained an average of 36 percent a year.

Then again, the Buffalo stocks have been on a roll for almost the entire decade. The stellar performance last year was the seventh straight double-digit gain for the local stocks and marked the fifth time in the last six years that the region's relatively unknown issues did better than the major market indexes.

Driving the strong gains were a surge in profits and the ability by a few of the local companies to shed some of their obscurity and get noticed by analysts at national or regional brokerage firms.

As a result, 11 of the 24 local stocks managed to beat the 22.6 percent gain by the Dow Jones industrial
average and the 21.6 percent rise by the Nasdaq composite index, as well as the 31 percent jump by the Standard & Poor's 500 index.

Some of the gains were downright impressive, with seven of the local stocks turning in gains of more than 50 percent. And the good fortune was spread around rather widely, with 14 of the local stocks posting double-digit gains. Yet six of the local stocks still managed to lose value, despite last year's record-setting rally.

The surge was capped by a year-end push this week that allowed the Buffalo Portfolio to avoid its first losing quarter since the first three months of 1994. The local stocks ended the fourth quarter in positive territory -- albeit barely -- with a 2.8 percent gain.

It was the weakest quarter for the local stocks since the third quarter of 1996, but the slow finish gave some symmetry to the year as a whole. The year started out slowly, beginning with a 3.1 percent rise in the first three months of the year, then gained steam toward a 9.7 percent gain in the second-quarter and peaked with a 19.1 percent jump in the third-quarter.

The modest fourth-quarter gain still was better than the 0.5 percent dip in the Dow and the 6.8 percent drop by the Nasdaq composite and just topped the 2.4 percent gain by the S&P 500.

Astronics leads gainers

The top local stock last year was Astronics Corp., a Buffalo-based company that makes electroluminescent lighting systems for airplanes and other uses, as well as folding boxes and imprinted products for specialized markets.

Astronics stock, which has been one of the hottest local issues during the last three years, soared by 90 percent last year after surging by 78.6 percent in 1996 and 55.6 percent in 1995.

A sharp, yet steady rise in profits is the biggest reason behind the surge in Astronics stock. Rising productivity stemming from its investments in new equipment and processes during the last three years have helped the company boost its earnings for 14 straight quarters. While Astronics' profits have been rising at a rate of 40 percent a year during that time, the company's sales also have increased for 13 straight quarters.

A third-quarter surge pushed Servotronics Inc. stock into the second-place slot with a 68.2 percent gain. The Elma servocontrols maker, which has seen its pretax profits rise for four straight quarters, turned in its second consecutive strong performance after rebounding from a 20.5 percent loss in 1995 with a 35.8 percent gain in 1996.

Computer Task Group Inc., the Buffalo-based computer services firm that was the hottest local stock in 1996 and No. 2 in 1995, came up as the third-best issue last year with a 64.9 percent gain.

That increase came despite a 15 percent sell-off in CTG's stock during the fourth quarter as technology stocks cooled. But the slip wasn't enough to keep CTG's stock from turning in its fourth straight year with gains of at least 26 percent.

Once again, strong profits were a big reason behind the run-up in CTG's stock, with the company's earnings through the first three quarters rising by 64 percent.

Those rising profits helped CTG, which had no analyst coverage in early 1996, continue to catch the eye of analysts. Evern Securities began following the stock in November and put an "outperform" rating on the stock, while UBS Securities added coverage in July with a "buy" rating.

In addition, CTG continues to be dogged by speculation that it is a takeover target. Sam Albert, a Scarsdale, N.Y., management consultant, listed CTG as a potential takeover target for International Business Machines Corp., one of CTG's biggest customers, in an interview with Bloomberg News in late August.

Graham Corp., buoyed by nine straight quarters of higher profits, finished in the No. 4 spot, even though the Batavia heat transfer and vacuum equipment maker's stock tumbled 22 percent in the fourth quarter after it said it would only break even during the quarter that ended Wednesday.

Graham said the weakness, which also is expected to keep its profits for the entire fiscal year below the $3.1 million the company earned a year ago, was due to the economic turmoil rattling some of its key Asian markets.

While Graham executives still expect the Far East to be a source of new orders, they think those markets will become more competitive as the declines in local currencies compared with the dollar make U.S. exports more expensive.

The No. 5 spot fell to First Empire State Corp. The ever-rising prices that investors are willing to pay for stocks in the rapidly consolidating banking industry, coupled with a 17 percent rise in profits through the first three quarters, helped push First Empire shares up by 61.5 percent last year.

Of course, First Empire has, thus far, been the one doing the taking over, including its $872 million deal last October to buy Onbancorp Inc. While the takeover is expected to trim First Empire's earnings this year by 4 percent, cost savings and revenue expansion from the deal should boost the banking company's profits over the long run, bank officials have said.

Integrated Waste leads losers

Among the losers, no company had it worse last year than Integrated Waste Services Inc., the Buffalo-based firm that sold off and closed its demolition and industrial cleaning businesses.

The company's great hope for salvation -- opening a new landfill in Farmersville -- grew ever more distant as the firm's staggering financial problems meant it needed to come up with new sources of money to complete the process for obtaining a permit to open and run the dump.

As a result, Integrated Waste's shares turned into a penny stock in the truest sense of the word, finishing the year down 93 percent with each share worth a mere 1 cent.

Rand Capital Corp. had the dubious distinction of having the second-worst year among the local stocks, with the Buffalo venture capital firm's shares falling by 34.8 percent. Although the company's new management team is confident that its new investment strategy and cost-cutting efforts will lead to solid gains, that improvement has yet to materialize, including a 6 percent drop in Rand's net asset value during the third quarter.

It was the fourth straight rough year for Rand stock, which lost 58.9 percent of its value in 1996.

Acme Electric Corp., which has lost money in three of the last five fiscal years and made only small profits in the other two, found it tough sledding last year in a stock market that is obsessed with earnings growth. The East Aurora-based electronics manufacturer's stock fell by 27.8 percent after losing 26 percent in 1995.

It was feast or famine for Gibraltar Steel Corp., which was the second-best local stock in 1996, only to fall to the fourth-worst last year after the Hamburg-based steel processors' earnings fell well short of analyst expectations. As a result, Gibraltar's stock fell 24.8 percent last year.

"We see Gibraltar Steel as a well run, but fully valued processor," said Kenneth W.P. Hoffman, a Prudential Securities Inc. analyst. "While we believe Gibraltar has accomplished a lot since going public, we believe that its high relative debt level, combined with its high relative valuation, makes this stock a true hold-rated company."

Elusive profits also plagued Barrister Information Systems Corp., whose stock lost 22.2 percent as the Buffalo software and computer services firm was stung by problems at its service business, which was battered by the loss of some major subcontracts from IBM.

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