LARGE CAP GROWTH INVESTING - MICHAEL K. FARR - FARR, MILLER & WASHINGTON, LLC

• On 1:55 pm EDT, Thursday September 10, 2009

67 WALL STREET, New York - September 10, 2009 - The Wall Street Transcript has just published its Investment Analysis Report offering a timely review of the sector to serious investors and industry executives. This 57 page feature contains expert industry commentary through in-depth interviews with Equity Analysts and Money Managers. The full issue is available by calling (212) 952-7433 or via The Wall Street Transcript Online.

Topics covered: Management Teams -- Secular Trends -- Regulatory Concerns -- Focus on Quality -- Developing Postsecondary Education Programs -- Growth in Postsecondary Education -- Online Education -- International Students -- Student Funding -- Execution Risk -- Management Transition -- Acceleration of Enrollment Rates -- Return on Invested Capital -- Long Term Prospects -- Regulatory Uncertainty -- Valuation Levels -- Stafford Loans -- Earnings Growth -- Opporunity for Growth -- For-Profit Institutions -- Nontraditional Students -- Postsecondary Tuition -- Domestic Players -- Jobs Market -- Decline in Stock Prices -- Fundamental Trends -- Valuation Levels -- Postsecondary Education in China -- Global Education -- Growth Prospects

Companies include: SkillSoft plc (SKIL); Rosetta Stone Inc. (RST); American Public Education Inc. (APEI); Apollo Group Inc. (APOL); Bridgepoint Education Inc. (BPI); Career Education Corp. (CECO); Capella Education Co. (CPLA); DeVry Inc. (DV); ITT Education Services Inc. (ESI); Grand Canyon Education Inc. (LOPE); Strayer Education Inc. (STRA); Blackboard Inc. (BBBB) and Universal Technical Institute Inc. (UTI); Corinthian Colleges (COCO); Lincoln Educational Services (LINC); School Specialty (SCHS); New Oriental Education & Technology Group (EDU); Princeton Review (REVU)

In the following brief excerpt from the 57 page report, Michael K. Farr discusses the outlook for the sector and for investors.

TWST: Why don't we start with an overview of Farr, Miller & Washington and your investment philosophy?

Mr. Farr: Farr, Miller & Washington is a conservative large-cap investment management firm in Washington, DC. We manage money for both individuals and institutions. About two-thirds of our assets are managed for high net worth individuals, with the remaining third of our clients comprised of various institutions including endowments, foundations and Taft-Hartley accounts. We run a fairly concentrated portfolio consisting of 30-40 stocks. Our approach is bottom up. We rely heavily on fundamentals and we need to see above-average earnings growth as a precondition for every stock we consider. We also manage bonds and we have a Small/Mid-Cap portfolio as well. So we have a fairly broad traditional product offering. When the consultants come in and review our performance, they show that our composite of fully-discretionary accounts has historically gone down roughly 80% as much as the market on average in down markets, while going up slightly over 100% on average in up markets. Therefore, we have historically added the most value in weaker markets. This approach reflects our overriding objective, which is capital preservation for our clients. This approach has also led to strong relative performance over short and long periods of time, and we've beaten the S&P 500 over the past one, three, five, seven, ten years, and since inception. For the trailing four quarters ended June 30, 2009, we ranked in the top 3% of all large-cap growth managers, according to the PSN Enterprises Database of large-cap growth managers.

TWST: Would you give us some more background on what attracted you to the likes of Microsoft and Wal-Mart at this time?

Mr. Farr: Wal-Mart was down about 20% from the highs that it hit in September 2008. Meanwhile, the market staged a huge rally off of the March 2009 lows. Consequently, WMT went from trading at a sizable premium to the S&P500 to a sizable discount. We believe that it is possible that the consumer remains constrained for a long time. This is the type of environment in which WMT thrives. Microsoft was similar story. Again, it's a company with a great balance sheet, earnings growth that we think will pick up, and a very reasonable valuation. We started buying Microsoft at ten times earnings, which is a multiple that essentially discounts a no-growth scenario for the company forever. We believed that a no-growth scenario for MSFT was way too pessimistic so we purchased the stock.

TWST: What was the third company you mentioned?

Mr. Farr: Google. Google is another example. Google got down to about $300 a share in early March. It is a company that we'd always wanted to buy but could never justify the valuation. The stock had come down from about $740 to about $300. We think that the long-term secular growth trend for Internet advertising remains in place, and Google is clearly the dominant force in that business. Google has yet to be successful in areas outside of search, but it certainly remains possible that this could change as the company continues to generate excellent cash flow that it uses to move into other markets.

TWST: What about a couple of examples from the SMid arena?

Mr. Farr: One that's a little bit smaller is a company called Patterson Companies (PDCO), which is one of the largest dental distributors in the U.S. This a company that had consistently grown earnings at 10 to 15% per year. Suddenly the consumer stopped going to the dentist as often and the stock got crushed. The PE multiple on the stock fell from a high of 35x four years ago to 10x-11x near the market lows. Though Patterson clearly exhibits some sensitivity to the economy, its business remains much more stable than that of the average company and yet investors could purchase it at a discount to the market. The stock has rebounded nicely but still remains attractive in our opinion. Rather than going into a shell when the market was collapsing, PDCO used its strong balance sheet and cash flow generation to purchase smaller private companies at very reasonable valuations. These types of bolt-on acquisitions have historically added lots of value for Patterson shareholders and we applaud management for making these acquisitions when everyone else was afraid to buy anything.

TWST: Do you see any challenges ahead for investors that they should be wary of now?

Mr. Farr: There are always challenges. The market appears to be discounting a normal cyclical recovery in earnings in 2010. This might happen but it might not too given the fact that the U.S. consumer accounts for 70% of GDP and the U.S. consumer has only slightly less debt as a percentage of income as he/she had at the peak in 2007. This raises the question of "Where will actual demand come from once the government stops propping things up?" This only increases our comfort with the large, stable companies that are typically found in our Large Cap Growth portfolios.Two additional risks that I would mentioned. The first is emotional risk, or the risk of making investment decisions emotionally rather than dispassionately. One of my long-standing rules about investing is, if it feels bad, do it. Forget everything you learned in the 70s, if it feels bad, do it. It felt really bad to be buying in March and that's precisely what you should have been doing. It certainly doesn't feel good to be selling right now. I think you probably should be trimming some positions right now, but the best market moves are counter-intuitive when it comes to your emotions. The other risk right now that I think is quite significant is policy risk. Government's involvement in the economy has gotten to a nearly unprecedented level as a result of the historic measures required by the government to keep the U.S. financial system from imploding last year. It's very difficult to judge by any sort of historical norms the influence of all the types of intervention that the Fed, Treasury and Congress have provided to the markets. One thing that we do know is that the government has a lot of debt and that deficits appear to be only getting larger and larger. This can't continue forever. There is a lot of policy risk out there and it's very difficult to judge the cleanest, most conservative ways forward.

TWST: Thank you. (PS)

MICHAEL K. FARR Farr, Miller & Washington, LLC 1020 19th Street NW Suite 200 Washington, DC 20036-6101 (202) 530-5601

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