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Decoding the Selection Process By George S. Farra Individual investors have long wondered what separates their own results from that of professional portfolio managers. The simple answer is successful professionals adopt and continuously improve a stock selection process that is designed to produce consistent results with fewer surprises. Our firm, Woodley Farra Manion Portfolio Management, was founded in 1995 with an express goal of implementing my and Don Woodley’s philosophy of investing in great companies whose stock prices may be undervalued and also pay good dividends. How we get to the end of the process that produces 25 individual stocks in a client portfolio follows: Step 1: Use a database There are over 11,000 publicly traded stocks in the various markets in the United States. Reducing this vast number to a workable population of candidates is simplified by access to a database that updates its information on a daily basis and also scrubs the data to ensure its information is reliable and timely. Step 2: Determine screening criteria Reducing the population from 11,000 stocks requires determining what type of investment philosophy is your best fit. Woodley Farra has a value-oriented approach, meaning we are looking for companies whose current stock price is below what we believe is the longer term true value of the company (Warren Buffet falls into this camp.) Other investors may be growth-oriented and instead are looking for momentum indicators that may yield quicker, but potentially more volatile results. Woodley Farra has four primary filters: companies with a market value greater than $1 billion, a current price/earnings ratio (the current market value of the company divided by net income) less than that of the market, earnings growth equal to or greater than the market and a dividend yield that has the potential to be increased faster than the rate of inflation. Application of these filters usually reduces the population of companies to a range of 400 to 1,100. The wide range results more from the stage the market is currently at. A strong market usually reduces the number of attractive companies since more stocks have risen in value; conversely, a weak or bear market increases the population accordingly. We apply our screens every Monday and note the number falling into the pool of candidates to help gauge the state of the market. (We currently are seeing the number of candidates falling at the midpoint of this range.) Step 3: Rank the candidates Using a valuation measure such as the p/e ratio, we rank the candidates from the lowest to the highest. A lower p/e ratio implies a stock with potentially greater upside potential; a higher p/e can leave less room for error. Using two or three rankings helps broaden the pool of companies to review. Step 4: Individual company analysis At this stage, we begin a four-step analytical process to determine if a company’s stock is indeed undervalued or not. -Fundamental – This entails a complete analysis of a company’s financial and competitive health.

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