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Local stocks post 13.6% gain in year That lags the Dow's return for the year, but beats the Nasdaq's, matches S&P 500's

The Buffalo Niagara region's stocks weren't world beaters in 2006, but they still did just fine.

While the local stocks fared worse in 2006 than the Dow Jones industrial average for the first time in seven years, the Buffalo Portfolio still put up its strongest returns in three years and turned in its second-best gain since 1997.

A portfolio that owned a single share of each of the local stocks last year would have gained a solidly above-average return of 13.6 percent -- the third time in the last six years that the Buffalo Portfolio has posted double-digit gains.

But the competition was tougher last year, too. The local stocks couldn't keep up with the 16.3 percent gain by the Dow, while matching the 13.6 percent increase in the Standard & Poor's 500 index. The Buffalo Portfolio topped the 9.5 percent jump in the Nasdaq Composite index for the sixth time in the last seven years.

For the local stocks, 2006 was their fourth straight year of gains, capping a rally that has produced annual returns averaging 15 percent. The small, value-oriented company stocks that dominate the Buffalo Portfolio have enjoyed a remarkable run on Wall Street.

Small company stocks "have really defied logic over the last few years," said Lawrence V. Whistler, the chief investment officer at Nottingham Advisors, an Amherst money management firm. "We've all been waiting for large caps to outperform for the last few years."

Even so, the local stocks couldn't keep pace with their peers nationally, trailing the 17 percent surge by the Russell 2000 index of small company stocks for the third time in the last four years.

Strong profit growth, coupled with modest inflation, stabilizing interest rates and moderate economic growth gave the stock market a good foundation in 2006, local analysts said.

"I think what the market is doing is catching up on all the good economic news," said David Elias, president of Strategic Investor, an Amherst money management firm.

"Interest rates have gone up, home sales have been weak, yet the market has still gone up," he said.

It was a good year for stocks, in part, because some of the factors that depressed gains in previous years reversed course and gave the market a boost in 2006. Energy prices, which hit record highs late last year and early this year, had eased by the end of 2006, while the steady climb of interest rates also came to an end.

"That was fortuitous," said Anthony J. Ogorek, who runs Ogorek Wealth Management, an Amherst financial planning firm. "Those two things intersected and that bailed the market out."

In general, the market's rising tide lifted most of the 22 stocks that make up the Buffalo Portfolio, with just four posting declines for the year, while nearly two-thirds turned in gains that topped 12 percent.

No local stock had a better year than Minrad International, as the promise of big sales increases in coming years through a series of overseas distribution agreements sent the Orchard Park-based anesthesia and medical device maker's shares soaring by 259 percent.

On the downside, only Graham Corp. shares stumbled badly, with the Batavia-based heat transfer equipment maker's shares dropping by 41 percent after its shares more than tripled in 2005 to claim the title as the region's hottest stock.

The local stocks finished the year with a flourish, jumping by 6 percent in the fourth quarter, but their year-end rally wasn't as strong as the rest of the market's finishing kick. The local stocks in the fourth quarter fared just a tad worse than the 6.7 percent gain in the Dow and the 6.2 percent increase in the S&P 500, as well as the Nasdaq's 7 percent increase.

That capped a year that got off to a strong start with an 8.7 percent jump in the first quarter, only to stagger through the spring and summer with a 2.2 percent second-quarter loss and a 0.7 percent gain in the third.

>The gainers

The potential for a huge surge in sales at Minrad over the next three years caught the eyes of investors in a big way, causing the fledgling company's shares to more than triple despite continued losses.

While Minrad's third-quarter sales nearly quadrupled to slightly more than $5 million, investors were drawn by the potential for even bigger revenue gains.

Minrad executives expect the company's sales to soar over the next three years as the company gains approval to sell more of its anesthesia products in additional countries.Minrad's sales agreements with distributors would generate at least $125 million in anesthesia sales in 2009 if the revenue minimums are met on all of those contracts.

Another local stock that got a boost from the potential for future gains in its business was Rand Capital Corp., the Buffalo-based venture capital firm, whose shares soared by 161 percent.

While the value of Rand's investment portfolio has increased modestly for three straight quarters, company President Pete Grum has said that some of the companies it has stakes in are making steady improvements that could increase their value in the future. That could allow Rand to increase the value of those investments on its own books, boosting the underlying value of its portfolio.

"Several of our companies are reaching this stage and will be re-evaluated in the coming quarters," he said.

Shares Elma servocontrol and cutlery maker Servotronics Inc. rode a strong first quarter surge to finish the year with a 78 percent gain. Despite the loss of a key U.S. Marine Corps bayonet and combat knife contract, Servotronics' profits have increased for five of the last six quarters.

>The losers

Graham shares had a tremendous year in 2005. They had a year to forget in 2006.

Graham's two-year streak of rising profits came to a screeching halt in the second quarter as the company was swamped by too much work and stung by an unprofitable contract as the oil boom continued to drive up its sales.

With the overload of work cutting into profit margins and its Batavia factory running at capacity, Graham was forced to reduce its sales growth forecast just months after chief executive William Johnson left the company for personal reasons after presiding over its powerful resurgence last year.

"They haven't been able to keep up with the growth and they got overwhelmed with some of the costs," said Brad McAdam, the research director at the Bullfinch Funds in suburban Rochester.

Evans Bancorp shares also took a hit this year, dropping by 5 percent as the company endured the departure of its two top executives and a weakening earnings performance during the spring and summer quarters.

With chief executive James Tilley retiring and chief financial officer Mark DeBacker leaving to join a Las Vegas bank, Evans hired First Niagara Financial Group executive David J. Nasca to succeed Tilley next year.


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