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The Buffalo Niagara region's stocks moved back to the head of the class last year.

A portfolio that owned a single share of each of the stocks of companies based in the Buffalo Niagara region last year would have gained an above-average return of 11.6 percent. the fourth time in the last seven years that the Buffalo Portfolio has posted double-digit gains.

While the overall stock market was posting mediocre gains, the Buffalo Portfolio beat all of the major market indexes for the first time since 2005 and the fifth time in the last eight years.

The competition wasn't close, either. The local stocks rose almost twice as much as the 6.4 percent increase in the Dow Jones industrial average and more than three times the 3.5 percent gain by the Standard & Poor's 500 index. The biggest challenge came from the Nasdaq Composite index, which rose 9.8 percent.

Debbie Snyder works on F16 fighter jet control system at Astronics Corp

The local stocks, which are dominated by small, value-oriented company stocks, even trounced their most closely matched major index, the Russell 2000 index of small company shares, which dropped by 2.8 percent last year.

For the local stocks, 2007 was their fifth straight year of gains, capping a rally that has produced annual returns averaging 14 percent, outpacing the comparable 11 percent average return by the S&P 500 by a comfortable margin.

The strong performance of the Buffalo Portfolio was mostly due to huge gains by a pair of local stocks - Graham Corp. and Astronics Corp. - which had an inordinate impact on the overall increase by the regional portfolio. If you exclude those two companies from the Buffalo Portfolio, the local stocks were essentially flat last year.

Still, the Buffalo Portfolio bucked the emerging trend in the stock market toward big company stocks, with investors generally favoring a growth-oriented approach over the value-based tack that had held sway for much of the last few years.

"We've been in an environment where we've seen small caps outperform," said Bruce Kaz, the president of Courier Capital Corp., a Buffalo money management firm. Now, the trend favors the stocks of big companies that get a major portion of their business from outside the United States.

Part of that theory is based on the subprime mortgage meltdown and the drop in housing prices that are rattling the U.S. economy. By investing in bigger companies that have a broader exposure to overseas markets, investors are able to diversify their portfolios and hedge some of the economic risks.

"It's times like this when you stay diversified," said Lawrence V. Whistler, the chief investment officer at Nottingham Advisors, an Amherst money management firm. "The global economy is still very strong."

Despite slowing growth in the U.S. economy and the turmoil in the housing and financial sectors, the flow of investment money from the booming Chinese economy and oil money from the Middle East are helping to prop up the stock market, said David Elias, president of Strategic Investor, an Amherst money management firm.

"They're putting a safety net under our market," Elias said. "The market is holding up exceptionally well."

The stock market is getting off to a bad start in the first week of the new year, however. In the first three trading days of 2008, the Dow lost 3.50 percent, the S&P 500 fell 3.86 percent and the Nasdaq composite dropped 5.57 percent.

The solid overall performance in 2007 by the Buffalo Portfolio masked a choppy year for the 21 companies that make up the local index. Just 12 of the local stocks ? slightly more than half - managed to turn in gains last year, despite the general updraft in the market.

At the same time, 10 of the local stocks -or more than 40 percent of the firms in the Buffalo Portfolio - went down last year, and each of the losses were no smaller than 19 percent. (There are 21 companies and 22 stocks because Moog Inc. has two classes of stock.)

In some ways, 2007 was a mirror image of 2006 for the stocks at both ends of the Buffalo Portfolio.

No local stock had a better year than Graham Corp., which rode the oil boom to nearly quadruple its share price in 2007 as high commodity prices sparked a flurry of new investments in oil refineries and petrochemical plants that use the pumps, condensers and ejector systems that the Batavia-based manufacturer makes.

It was a continuation of the roller-coaster ride for Graham, which was the Buffalo Portfolio's worst performer in 2006 after claiming the prize as its hottest stock in 2005.

But Graham wasn't the only local stock finding that turnabout is fair play. Minrad International - 2006's hottest stock - was last year's biggest loser, as production delays caused the Orchard Park-based anesthesia and medical device manufacturer's shares to drop by 41 percent after more than tripling in 2006.

The local stocks were remarkably consistent for much of last year, rising by 1.7 percent to 1.8 percent during each of the winter, summer and fall quarters, with a 7.9 percent surge during the spring accounting for more than half of the year?s gains.

The gainers

After shunning Graham's stock in 2006, when the company was stung by production limitations and some unprofitable contracts, investors flocked to Graham?s shares last year as the capacity issues were resolved and orders flowed in at a rising rate.

Graham's sales during the fiscal year that ends in March are projected to reach $80 million to $85 million, which would be up about 25 percent from a year earlier, while its flow of new orders through the first three quarters of its fiscal year is running 22 percent of last year's pace.

James Lines, Graham's president and chief operating officer, doesn't think the good times will stop anytime soon, with oil prices around $100 a barrel. "Spending in the oil refining sector continues at an unprecedented pace," he said. "The market fundamentals lead us to believe that this cycle can be sustained through 2010, and perhaps beyond."

Astronics stock soared by 148 percent as the East Aurora manufacturer of aircraft lighting and electronics systems cashed in on the growing demand for the in-seat power supply products it makes to run laptops and other consumer electronics.

That rising demand, coupled with a generally strong year for the aircraft market, allowed the company to predict that its sales this year will jump by roughly 40 percent, while continuing a streak of sharply higher profits. Astronics chief executive Peter Gundermann, however, has warned that revenue growth this year likely will slow to the 10 percent to 20 percent range.

Elma motion control equipment and cutlery manufacturer Servotronics also had a strong year, with its shares jumping by 74 percent as a surge in its military knife sales brought that unit back to profitability.

At the same time, the company said it expects sales at its Advanced Technology Group, which accounted for about half of its revenues, to keep this year because of its push into new markets and the beginning of production on some of its contracts.

The losers

While Minrad investors in 2006 homed in on the promise for higher sales as they pushed the stock to the top of the Buffalo Portfolio, they hammered the shares last year when production delays held back that sales growth and added to the company's losses.

As a result, Minrad's shares tumbled by 41 percent last year, after soaring by 259 percent in 2006. The delays in expanding capacity at its Bethlehem, Pa., anesthesia plant held revenues down and kept the company from trimming its losses, leaving Minrad short of cash by the end of the year. The company eased that squeeze late last month by lining up a $1 million line of credit from First Niagara Bank. The upgrades to its Pennsylvania plant also were completed by late last year, which should make Minrad?s production more efficient.

The slumping housing and auto markets took a toll on Gibraltar Industries shares, which tumbled by 34 percent.

The company endured its first quarterly loss in almost 14 years during the third quarter and executives warned that profits in the fourth-quarter are likely to be 20 percent to 40 percent lower than they were a year ago, excluding any special charges.

drobinson@buffnews.com