A few months later, COVID happened and the stock was a prime beneficiary. It roughly 5x’ed from our selling price.

I felt awful.

My boss had a great perspective on it. We had good reasons to sell and we would have made the same decision with the same information. Move on.

In the short-run, luck drives the majority of our returns. Over time and many iterations, however, skill should shine through. The product of well thought out decisions should tilt the scales in our favor in the long run.

Even knowing this doesn’t make it easier to manage a troubled position.

Troubled stocks force an internal debate that requires the right balance of introspection and action. If the scales fall too heavily on one side, it can have disastrous effects.

Sell too quickly and you prevent yourself from holding onto a potential winner. Defer a decision for too long and you can further impair your capital.

The topic of selling a troubling stock has been on my mind recently, as I’m struggling with what action to take - if any - on some current holdings that are down between 20-40% in an otherwise strong market.

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This internal debate brought to mind Buffett’s commentary in the 2014 annual letter about the poor outcome of his Tesco investment.

Ultimately, Berkshire took a $444 million after-tax loss on Tesco - one of the worst outcomes in Buffett’s illustrious career.

Here’s what he said in the letter:

Attentive readers will notice that Tesco, which last year appeared in the list of our largest common stock investments, is now absent. An attentive investor, I’m embarrassed to report, would have sold Tesco shares earlier. I made a big mistake with this investment by dawdling.

At the end of 2012 we owned 415 million shares of Tesco, then and now the leading food retailer in the U.K. and an important grocer in other countries as well. Our cost for this investment was $2.3 billion, and the market value was a similar amount.

In 2013, I soured somewhat on the company’s then-management and sold 114 million shares, realizing a profit of $43 million. My leisurely pace in making sales would prove expensive. Charlie calls this sort of behavior “thumb-sucking.” (Considering what my delay cost us, he is being kind.)

During 2014, Tesco’s problems worsened by the month. The company’s market share fell, its margins contracted and accounting problems surfaced. In the world of business, bad news often surfaces serially: You see a cockroach in your kitchen; as the days go by, you meet his relatives.

Buffett's mistake, though painful, contains some useful lessons.

• Focus on the moat: Moats are never static - they are either getting wider or narrower each day. As Buffett noted with Tesco, it was losing market share and margins contracted during a UK grocery industry price war. Not a good setup for widening the moat. A good question to ask yourself here is, “Do I think the company’s products or services will be at least as relevant to its customers in 3-5 years as it is today?”

• Take management changes seriously: Undiscussed in the quote above, Tesco made a big CEO change during Berkshire’s holding period. When Buffett first bought shares in 2006, Tesco was led by CEO Terry Leahy who, over a 14-year tenure, more than quadrupled the company's pre-tax profits and its store count. In 2010, he announced his departure at a highly uncertain time for the company. It’s true that successful CEOs have the right to exit the stage, but the succession process should be well communicated and orderly. Unexpected leadership transitions deserve deeper scrutiny because they can reveal underlying business challenges.

If your confidence in the company’s moat or management wanes, it’s time for an honest reassessment of the investment.

One way to soberly evaluate your current view is to ask yourself, “With each new interaction with the company or new bit of analysis, am I becoming more or less confident?”

If your confidence is weakening because the moat is narrowing, the culture is deteriorating, or management is damaging your trust, sell and move on.

Why? Because if you have lost confidence and the stock tanks thereafter, you’ll feel twice as bad. You knew better and still took the opposite decision. You intentionally shifted your mindset from investing to hope and hope is not a sustainable investment strategy.

What’s more, you’re tying up your capital in a stock you don’t have confidence in when there are thousands of alternatives for which that wouldn’t be the case. In other words, there’s an opportunity cost for dawdling on a decision.

The best way to frame the decision is, “Would I still buy the stock today at the current price at the same weight as I currently have in my portfolio?”

This question naturally incorporates valuation. It's possible the moat has weakened slightly, but the stock has declined even more. In that case, the shares could still be attractive today, albeit at a smaller weight than before.

If you wouldn’t buy the stock today at its current weight, sell and move on. Good decisions don't always lead to good outcomes, but that's a risk every investor has to accept if they hope to be successful in the long run.

Enjoyed this article? I write for investors who care more about process than predictions and regularly share thoughts on individual companies on my radar.

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Stay patient, stay focused.

Todd

Todd Wenning is the President & CIO of KNA Capital Management, LLC, an Ohio-registered investment advisor that manages a concentrated equity strategy and provides other investment-related services.

At the time of publication, the author, his immediate family, and/or KNA Capital Management, LLC or its clients own shares of Berkshire Hathaway.

Please see important disclaimers.

Armed with capital-light models and high switching costs, software multiples expanded under the assumption that these economics would last forever.

Then AI arrived. As AI abilities - or perhaps more accurately, the perception of AI abilities - rapidly grew, investors started to question the sustainability of SaaS business models.

• Could a customer just internally develop comparable software at a fraction of the cost?

• Could a well-funded startup, armed with modern AI tools, simply code its way around an entrenched incumbent in months rather than years?

• Does this new reality shift bargaining power away from software companies and to the customer?

For many SaaS businesses, these are questions without easy answers. Terminal value drives valuation and SaaS terminal values have become more difficult to underwrite with confidence.

The company I’m writing about this quarter is one of those SaaS businesses that saw its multiple slashed in the last 18 months, but its structural moat has arguably never been cleaner.

This company’s moat was never primarily about the quality of its code, which AI could replicate. Its moat is instead anchored in something far more durable, and far more boring, than that.

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I recently recorded a podcast episode with Lawrence Hamtil, a principal and financial advisor at Fortune Financial in Overland Park, Kansas.

Lawrence has long been one of my favorite people to follow on Twitter/X for his ability to see through market noise and deliver well-reasoned and thoughtful commentary. He’s also a co-host of the Preferred Shares Podcast, which I was recently on to discuss Ferguson.

Please let me know what you think about these podcast episodes. It’s easier than ever to record and edit these podcasts, but there are also myriad ways to organize and produce them. Any feedback - especially well-intentioned critiques - is greatly appreciated.

You can listen or watch this episode above or wherever you get your podcasts.

Stay patient, stay focused.

Todd

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Todd Wenning is the founder of KNA Capital Management, LLC, an Ohio-registered investment advisor that manages a concentrated equity strategy and provides other investment-related services.

At the time of publication, Todd, his immediate family, and/or KNA Capital Management, LLC or its clients own shares of Ferguson and Spotify.

Please see important disclaimers.

At the end of the first quarter, Spotify had 761 million monthly active users (MAUs), implying that approximately one of every 11 humans on the planet engaged with the platform on average each month during the quarter.

41 sell-side analysts cover it full time.

And yet, I don’t think most investors understand why Spotify is able to consistently keep deep-pocketed competitors like Google (YouTube Music), Apple (Apple Music), and Amazon (Amazon Music) at bay - especially when this group uses music as a loss-leader.

At the recent investor day, management even laid bare the formula for success, but investors remain focused on only one side of the equation.

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You may know John Rotonti’s work from his excellent “The JRo Show” podcast episodes, where he interviewed distinguished portfolio managers and directors of research including Bill Nygren, Chris Bloomstran, and Win Murray and asked them detailed questions about their processes and philosophies.

If you ever wanted to know what it takes to be a professional analyst or run an efficient research team, there’s no better place to start than those conversations.

John is now a portfolio manager at Bastion Fiduciary, where he manages an industrials and infrastructure-focused fund.

In this episode, we cover a lot of ground, from what Stan Druckenmiller’s discomfort with 6-baggers teaches us about position sizing to why corporate culture may be the most underpriced moat in the market today. John also makes a compelling case for why Amphenol’s co-engineering relationship with NVIDIA could be one of the most durable competitive advantages in the AI infrastructure buildout.

I think you’ll enjoy this one.

You can listen to the audio or video version of this episode below, on Spotify, YouTube, or wherever you get your podcasts.

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Todd Wenning is the founder of KNA Capital Management, LLC, an Ohio-registered investment advisor that manages a concentrated equity strategy and provides other investment-related services.

At the time of publication, Todd, his immediate family, and/or KNA Capital Management, LLC or its clients own shares of Spotify, Old Dominion Freight Lines, Howden Joinery, and NVIDIA.

Please see important disclaimers.

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At the time of publication, Todd, his immediate family, and/or KNA Capital Management, LLC or its clients own shares of Copart.

Please see important disclaimers.

How many times have you thought something like this?

“Wow, what a great company. I’d love to buy it, but 35 times earnings? That’s pricey. I’ll wait until it’s trading for 20 times earnings.”

So you wait and then for some reason, the stock sells off and it’s finally trading for 20 times earnings.

The buying opportunity you’ve been waiting for…right?

The answer depends on if this is a quality trap or a market overreaction.

There are a lot of opportunities like this today. Many former high-flying quality companies are now trading for 30%, 40%, or even more, off of their previous highs.

Here are just a few: S&P Global (SPGI), Intuit (INTU), Fair Isaac (FICO), Copart (CPRT), and Clorox (CLX). Just a few years ago, all were considered market darlings among quality-focused investors.

As we’ve discussed, quality traps are the biggest risk for quality-focused investors. These are cases where we pay a premium valuation for what we perceive to be a quality company, only for that multiple to diminish due to a narrowing moat.

Michael Mauboussin and Dan Callahan’s research found that companies that start in the top quintile (as a cohort) of ROIC have the worst subsequent performance if they don’t stay in the top quintile over the next three years.

That’s because what typically occurs is contracting multiples and slowing earnings growth - an inverse “Davis Double Play.” You think you bought a ruby, but what you actually bought was a rhinestone.

Reversion to the mean is a powerful force and great companies must continue to find ways to resist the gravitational pull toward mediocrity.

But sell-offs in quality companies can also be generational buying opportunities when the concerns are priced as secular risks even though they are actually cyclical risks.

Knowing the difference is hard and requires a deep understanding of the company’s competitive position (economic moat), management team (stewardship), cultural ability to respond to challenges, and the underlying value of the business.

One question you must ask yourself when evaluating drawdowns of quality companies is, “Do I think this company’s products and services will be at least as relevant 10 years from now as they are today?”

It’s a hard question to answer, especially for companies whose sell-offs are driven by rapid AI improvements, but that’s the point. Pull the threads necessary to evaluate that question and you’ll steer yourself in the right direction.

Two previously-profiled Flyover Stock companies - Installed Building Products and Mettler-Toledo - are currently in 38% and 32% drawdowns, respectively. Below, I provide updates on my thinking for both companies.

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Investors, analysts, and commentators will often throw around the phrase “duration” as it relates to stocks, but rarely do people explain what they mean by it.

Duration is a term more commonly used in the fixed income world. A bond’s duration is a good approximation for how much the bond’s price will change given a +/- 1% change in interest rates.

For example, a bond with a duration of 8 years should increase in value by 8% if interest rates decline by 1%, and vice versa.

But what exactly is duration?

In simple terms, duration measures how dependent an asset’s value is on distant future cash flows.

To keep it simple to start, let’s say we have a 1% annual coupon ten-year bond with a $1,000 par value. That means we collect $10 per year, each year, until maturity. At maturity, we get our final $10 coupon payment and the $1,000 par value back.

If the yield to maturity (i.e. the discount rate) is 5%, then the bond’s price is $691.13 - the sum of future cash flows discounted back to the present.

Pay attention to the contribution (% of Current Bond Price column) of each cash flow to the price.

Fully 89.7% of the bond’s price comes from the final year (Year 10) cash flow because it includes the return of the $1,000 par value. This $1,000 payment dwarfs the $10 coupon payments received each year and is thus the major driver of price.

Watch what happens when the yield to maturity spikes to 15% from 5% in the previous example.

Not only does the bond price decline by 57% to $297.37, but the contribution of the big Year 10 cash flow also declined from 89.7% to 84%. The nearer-term cash flows become relatively more important to the bond’s price.

In other words, the cost of waiting for that distant cash flow just went up - by a lot - and is therefore worth less to me relative to the nearer-term cash flows.

Contrast the above bond with a bond that pays a 10% coupon - $100 per year - under the same scenario.

Here, because the 10% annual coupons are more substantial, they carry more of the weight in the current bond price versus the 1% coupons above. Put differently, you get paid more while you wait.

In the 5% yield to maturity scenario, the Year 10 cash flow only accounts for 48.7% of the current value (versus 89.7% for the 1% coupon bond).

As a result, when the yield to maturity jumps to 15%, the 10% coupon bond still falls in price, but declines 46% instead of 57%.

A similar dynamic happens with stocks, even though the cash flows aren’t spelled out and there isn’t a maturity date.

The more a stock’s valuation depends on long-dated assumptions and terminal value, the more sensitive it becomes to changes in interest rates or risk perception.

This puts growth stocks in a particularly vulnerable position when interest rates rise sharply (as we saw in 2022) and/or risk premiums increase.

A company trading at 40x earnings may still be a bargain in the long-run, but it’s more likely to be a bumpy ride unless conditions remain favorable. That’s because so much is riding on the cash flows the company is expected to earn a decade or more from now. In other words, a low free-cash-flow yield stock is a long-duration instrument, like the 1% coupon bond above.

A stock with a higher starting free cash flow yield, on the other hand, is more like the 10% coupon bond. It’s not immune to changes in the risk environment, but it’s less sensitive because more of the stock’s current value is coming from nearer-term cash flows.

If your portfolio owns a lot of high-growth, high-P/E, or low free cash flow yield stocks, then you may have hidden duration risk. A big part of prudent portfolio management is risk management, so it’s important to be aware of not just company-specific risks, but how those companies, as a portfolio, respond to shifts in rates or risk appetite.

Investors can reduce duration risk by balancing long-duration holdings with companies that generate stronger cash flows today.

Of course, stocks are not bonds. The cash flows are not known up front. A great company can earn its high current multiple through better-than-expected operational performance, and a stock with a high free cash flow yield can reflect deteriorating business quality, so lower duration does not automatically mean lower total risk.

The first step in better risk management is knowing what risks are embedded in your portfolio. Duration risk is one of those risks that are less obvious, especially when markets are rising and the risks feel abstract. Remember that the farther your portfolio’s cash flows sit in the future, the more sensitive it becomes to changes in the present.

Stay patient, stay focused.

Todd

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Todd Wenning is the President & CIO of KNA Capital Management, LLC, an Ohio-registered investment advisor that manages a concentrated equity strategy and provides other investment-related services.

At the time of publication, the author, his immediate family, and/or KNA Capital Management, LLC or its clients do not have positions in any company mentioned.

Please see important disclaimers.

I would not be one of those who will foolishly drive a nail into mere lath and plastering; such a deed would keep me awake nights. Give me a hammer, and let me feel for the furring. Do not depend on the putty. Drive a nail home and clinch it so faithfully that you can wake up in the night and think of your work with satisfaction - a work at which you would not be ashamed to invoke the Muse. So will help you God, and so only. Every nail driven should be as another rivet in the machine of the universe, you carrying on the work.

-Thoreau, Walden

If we render unto AI what should be ours, then our profession is lost.

Another investor recently suggested I try Claude Pro for modeling.

I have to admit: it’s pretty extraordinary.

With a simple prompt of “Build a DCF model for Company XYZ. Include five-years of historical financial data” into the Claude Excel add-in, it did exactly that. It sourced data from the 10-Ks and other public sources, estimated cost of capital, included a scenario analysis, and built a five year forecast.

It took about five minutes to accomplish this task.

By comparison, building my own model and entering five years of financial data by hand takes a few hours. Deliberating over the forecast adds perhaps a few more hours.

From an efficiency standpoint, AI is the winner. (And it will only get better and faster.)

However, something important was missing - I didn’t understand the company as well as I normally do after building a model.

Entering historical data by hand might seem like a waste of time, but going through the process requires you to pay attention to every stitch of the finished product.

Why did the company decide to change the segment reporting in 2023?

That was an odd jump in receivables. What explains that?

Even if the same numbers show up in the AI-generated model, it’s much easier to gloss over them and never ask the important questions.

When you do it by hand, you can’t ignore them.

To be sure, AI can and should play a role in the craft of investing, but it’s important for us to understand the line between craft and efficiency.

Here’s an example of how AI can be used to enhance the craft. Let’s say you notice that receivables have been ticking higher after you entered them by hand. Now you can engage with AI to consider angles you hadn’t thought of before - Channel stuffing? A change in payment terms? A deteriorating customer? - and develop an even better understanding of the company’s underlying reality.

AI can’t answer questions it’s never asked. Engaging in the craft is the only way to generate the questions that really need answering.

Ultimately, investing is a decision-making business. The craft of investing lies in our ability to synthesize and discern information so that we can make better decisions.

To be a sound investing craftsman, then, it’s important to hold tight to what the craft demands - and it is demanding - and not yield to the easier path. We do the demanding manual work, however, because when the market tells us we are wrong, we are better positioned to hold our nerve.

Stay patient, stay focused.

Todd

Todd Wenning is the President & CIO of KNA Capital Management, LLC, an Ohio-registered investment advisor that manages a concentrated equity strategy and provides other investment-related services.

At the time of publication, the author, his immediate family, and/or KNA Capital Management, LLC or its clients do not have positions in any company mentioned.

Please see important disclaimers.

I’m not sure what it is - stretched valuations, the amount of capital sloshing around, etc. - but recent earnings results seem to produce bigger moves (up or down) than I can recall.

This week, a few Flyover Stocks had some big moves and I wanted to provide a quick take on each of them.

Tractor Supply - (-18% this week)

In my original profile of Tractor Supply, I wrote:

[A]nimal care staples…typically bring customers in the door. Over 50% of Tractor Supply’s revenue comes from animal care, much of it animal feed.

Animal feed is a difficult business. You need to have sufficient turnover to make it work, which is the pitfall that competitors typically face. If you don’t sell your food inventory quickly, you have two problems: your store smells like food and it attracts rodents. This creates a chicken-egg (pun intended) dilemma. You need food to sell, but if you don’t sell food quickly enough, you have problems.

Retail is tough and there’s little room for differentiation, but Tractor Supply’s key advantage versus the likes of Wal-Mart, Home Depot, etc. is its robust animal feed and care offerings.

Animal feed, in particular, is not amenable to e-commerce as it has a low value to weight ratio. It’s expensive to deliver to rural areas and no delivery person likes carrying 50 pound boxes to your door.

While Tractor supply noted no issues with livestock feed and care, the problem is with companion animal (e.g. dogs, cats) spending.

Here’s CEO Hal Lawton on the call:

“There was 96 million dogs in the market in 2023. That dropped down to about 94 million in 2024. And then I think most folks thought it would kind of stabilize around there. And then in 2025, you had a couple of million more dogs decline, going down to approximately 92 million.”

There are a number factors contributing to the decline in dog ownership, including:

1. Millennials as a cohort started families and entered their prime earnings years. In other words, they’re busier than ever.

2. The end of work from home. Dogs, in particular, require regular walks or at least outdoor access. Dog walkers/dog daycare is expensive.

3. The total cost of dog ownership has skyrocketed. A lot of local vets were rolled up by private equity in the 2020-2024 era, which has contributed to higher vet bills.

This is no small matter for Tractor Supply. Here’s Lawton again:

We're about 80% dog, 20% cat versus the market that's 60-40. We've always talked about -- our customers owns -- about 75% of our customers own a dog. Over 50% of our customers own a cat.

In other words, companion animals - and dogs, in particular - are key traffic drivers to Tractor Supply locations. The weakness in companion animal spending is showing up in Tractor Supply’s same-store-sales results, which were up just 0.5% this quarter.

While this is an important headwind for investors to consider, from a historical multiples perspective, Tractor Supply is worth a closer look today. This is particularly true if you believe the earnings slowdown is cyclical rather than secular.

Medpace - (-21% this week)

Todd Wenning is the founder of KNA Capital Management, LLC, an Ohio-registered investment advisor. KNA Capital Management manages a concentrated equity strategy and provides other investment-related services.

At the time of publication, the author, his immediate family, and/or KNA Capital Management, LLC or its clients own shares of Medpace and Chemed.

This profile is for informational purposes only and does not constitute personalized investment advice or a recommendation to buy or sell any security.

Please see important disclaimers.

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Earlier this week, I spoke with Morgan Housel - author of the international bestsellers The Psychology of Money, Same as Ever, and The Art of Spending - to discuss money in our 40s and beyond. There aren’t many personal finance books written for people in their 40s - mainly because there’s so much variation in people’s circumstances at that age. And yet, it’s a critical period in our financial lives that needs more attention.

After writing a post on this topic last year, I wanted to get Morgan’s thoughts on the subject. Morgan has an uncanny ability to cut through surface level thinking and address the heart of the matter. The hour flew as we were recording. That usually happens when you’re learning something worthwhile.

I hope you enjoy watching or listening to this podcast as much as I enjoyed recording it.

If you want the audio version of this podcast, you can find it on Spotify or wherever you get your podcasts.

Stay patient, stay focused.

Todd

Todd Wenning is the founder of KNA Capital Management, LLC, an Ohio-registered investment advisor. KNA Capital Management manages a concentrated equity strategy and provides other investment-related services.

At the time of publication, the author, his immediate family, and/or KNA Capital Management, LLC or its clients do not own shares of Duolingo.

This profile is for informational purposes only and does not constitute personalized investment advice or a recommendation to buy or sell any security.

Please see important disclaimers.

It’s worth thinking through some of these beaten-up companies to see if there is opportunity.

The stock I’m looking at today is in an 80% drawdown from its peak and 16% of its shares are still sold short.

Look, stocks don’t drop 80% without some real worry about terminal value - and those worries are quite reasonable - but there are some intriguing parts of this business that have me interested.

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On our trip, the students met with Morningstar, William Blair, Goldman Sachs, and got a tour of the CBOE pits. It was a great trip and it was fun to see the finance world from the perspective of a new hire again. For my money, when the weather is nice, Chicago is the best city in the country and we had two days of good weather.

The Market Is Rewriting Terminal Value

The continued rounds of recent software sell-offs have reminded me that we should always be thinking about terminal value. Stocks may trade on quarterly results or even management guidance updates, but big stock moves (+/- 10% on the day) are an implicit recalibration of terminal assumptions for growth, profitability, and risk.

Consider a simple example with the following parameters:

• Starting FCF: $100

• Explicit five-year FCF growth: 10%

• Terminal growth rate: 3%

• Discount rate: 9%

Here, our terminal estimates account for 78% of our ultimate valuation.

This percentage will vary by situation. The higher the discount rate, for example, the less valuable terminal value becomes, similar to how a bond’s duration decreases as interest rates increase.

Even if we use a 15% discount rate in the above example, the terminal value still accounts for 61% of our valuation.

In other words, only ~20–40% of what you’re paying for is tied to the next five years. The rest depends on what happens after.

If we believe that the market price represents an implied forecast of future cash flows discounted back to the present, then we can reasonably conclude that big price swings include new assumptions about terminal value given its weight in the present value calculation.

The ongoing sell-off in software (the “SaaS-pocalypse”), then, isn’t the market saying, “We’re worried about 2027 numbers,” as much as it is saying, “We are worried about what this company’s reality looks like in 2030 and beyond.”

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No one has a crystal ball, of course, but if you’re going to step into software right now, you need to consider what the current market price is suggesting about terminal value and determine if you agree or disagree with those numbers.

Qualitative assessments help with this exercise. Here are a few questions to consider:

• Do I think the company’s products and services will be at least as relevant a decade from now as they are today?

• Is the company’s corporate culture and management style amenable to long-term value creation?

• Is the company’s economic moat wide enough to give management time to respond to new challenges and opportunities?

All this is to say that it’s dangerous to jump into the SaaS-pocalypse if you’re thinking about short-term results and hoping the company beats next quarter’s earnings. For any of these companies to have a material turnaround, they will need to show investors that they stand a chance in the new AI world over the next 5, 10+ years.

Even if you have conviction in your long-term view on a particular software company today, it’s going to be an uncomfortable buy. And it should be. The distribution of terminal outcomes in software continues to be remolded by AI.

It’s true that great investments rarely begin without discomfort, but discomfort alone is not a thesis. It needs to be paired with your own vision for what the business can become, and a willingness to revisit that view as the landscape evolves.

Stay patient, stay focused.

Todd

Todd Wenning is the President & CIO of KNA Capital Management, LLC, an Ohio-registered investment advisor that manages a concentrated equity strategy and provides other investment-related services.

At the time of publication, the author, his immediate family, and/or KNA Capital Management, LLC or its clients own shares of Morningstar.

Please see important disclaimers.

As much as I enjoy meeting aspiring managers, I’m regularly asked the same questions and I find myself giving the same answers.

In the interest of scale and transparency, here are the lessons I wish I had fully understood before I took the leap.

1. It’s never been easier to set up a firm. You can launch a firm today for as little as a few thousand dollars and some paperwork for state registration, ADV filings, etc. Finding an insurer to underwrite my cybersecurity and errors and omissions (E&O) policies was surprisingly challenging. It’s best to work with an independent insurance agent who specializes in working with asset managers. I use Schwab as my custodian and they have been easy to work with and provide the institutional-grade security my clients expect.

2. This also means competition has never been more intense. Competition is increasing from both sides of the spectrum. The number of new RIAs continues to grow each year. Meanwhile, large RIAs are consolidating, becoming one-stop shops for high-net worth individuals and families. How will your new firm stand apart?

3. Know exactly what you want to do before you get started. Once you start filing paperwork it is difficult and expensive - especially if you’re working with attorneys - to make changes. I learned this the hard way. You should know exactly what your firm structure will be, your fee structure, whether you’ll charge fees in advance or arrears, and every other detail before you put ink to paper.

4. Your overhead is what you decide it will be. Before I launched KNA, I regularly heard that I needed to budget at least $50,000 in overhead for research materials, software, travel, etc. And that’s before any income I might take for myself. Yes, if you want office space, a Bloomberg, etc. you’ll easily get into the high five-figures, but as for me and my firm, the overhead is a fraction of what I’d heard. I intentionally keep overhead low to ensure the firm’s long-term stability. I work out of the house, I only travel when I think there’s a high ROI, and have found that I only need a few research tools for current needs. If you’re resourceful, you can accomplish a lot with a little. You can’t get around things like filing fees, insurance, etc. but with everything else you can be creative. Finally, being based in the Midwest is an advantage from a cost perspective.

5. To be an asset manager, you need assets to manage. If you didn’t work with clients at your previous firm, building a client base from a cold start is challenging. If you’re a natural introvert like me (and most other investors), putting on a marketing hat can be uncomfortable. Finding aligned clients may require you to do things outside your comfort zone like public speaking, hobnobbing at events, or even…golf. Investment skill is necessary, and there’s a certain glamour among our peer set in saying we don’t do marketing, but distribution is what determines whether you have a business at all.

6. Market before you launch. As with most products, anything that’s “new” has buzz. Take advantage of your pre-revenue phase by reaching out to potential clients prior to launch. At the very least, you can drive some feedback before the product hits the market.

7. Your investment time horizon has a high correlation to the time it takes to build your asset base. If you are a trader looking to maximize short-term returns, evidence of your skill becomes apparent fairly quickly. If you’re good, assets will also find you quickly. On the other hand, if you’re a long-term investor like I am and measuring yourself over rolling 3- and 5-year periods, you should expect it to take 3 to 5 years to make a name for yourself and organically drive inbound interest.

8. Having a second source of income is useful. Related to the previous point, you have to survive long enough to have a chance of success. For me, I teach and run this Substack. All three of my projects are related and reinforce each other. However you fund the early years - savings, a partner, or side income - you need a runway to get you to the other side.

9. Don’t expect too much from your Substack. I get a lot of questions about using Substack for secondary income and inbound marketing for KNA Capital. Don’t expect too much from either. Substack can help, but it’s not a client acquisition engine. Newsletter subscribers are more likely to be other professional investors or DIYers than potential clients of your RIA. RIA compliance also limits what you can say in the newsletter, which can dampen sales growth. Finally, Substack has become insanely competitive. You have to differentiate somehow and you have to understand that what makes a successful newsletter does not make a successful RIA.

10. At least half of your time will be spent on non-investment related tasks. The majority of my career was spent in research and portfolio management roles where I had little exposure to back office processes, trading, and accounting. When you’re running a solo RIA, that’s all on you. No, it’s not fun learning how to run Docusign or entering debits and credits into your accounting software, but it’s a necessary part of running the business. While these processes may not be “fun,” they provide you with a deeper appreciation for how businesses are run, which can carry over into your investing.

11. Set up good processes from the start. One of the nice things about being state-registered - at least in Ohio - is that the examiners are friendly and helpful. While my current client list might be manageable on a spreadsheet, my examiner gave me a good bit of advice to get a CRM before I really need one. I’ve been using one for about six months now, and it’s already proven useful as I add new clients and have more conversations with existing clients.

12. It’s a tremendous privilege to manage other people’s money. While I have ambitions for the firm, the first and foremost responsibility is to be a steward of each client’s capital. For private clients, you are likely managing a meaningful portion of their hard-earned capital that they depend on for retirement or other goals. For institutions, you are helping them achieve their organization’s goals, which can have meaningful impacts on society and the environment. This is a heavy responsibility and should not be taken lightly. Fostering these relationships is a reward in itself, and I’m deeply grateful for the trust my clients place in me.

13. I’m glad I did it. Starting my own firm had long been a dream of mine, but having lucrative full-time employment made it difficult to voluntarily take the leap of faith. The involuntary push I got clarified the decision. To be clear, the transition has not been easy on me or my family and has required sacrifices. (That’s why I named my firm after my wife and kids.) Anyone with dependents should understand that part of it. But it’s gotten better each year. I’ve never been busier, but I’ve never enjoyed the work as much as I do now. I would have regretted not doing it.

For many thoughtful investors, starting a firm is a natural aspiration. In reality, it has its highs and lows. Being an operator as well as an investor requires different layers of emotions, time management, and discipline. The more you are aware of these challenges before you take the leap, the better prepared you’ll be to take them head-on and build a successful firm.

I hope you found this useful.

Stay patient, stay focused.

Todd

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This post is for informational purposes only and does not constitute an offer to sell or a solicitation of an offer to buy any interests in any investment vehicle managed by KNA Capital Management.

Todd Wenning is the President & CIO of KNA Capital Management, LLC, an Ohio-registered investment advisor that manages a concentrated equity strategy and provides other investment-related services.

At the time of publication, the author, his immediate family, and/or KNA Capital Management, LLC or its clients do not have positions in any company mentioned.

Please see important disclaimers.

“I’m a better businessman because I’m an investor, and a better investor because I’m a businessman.” - Warren Buffett

Public companies are often seen as the “end state” for a startup or private company. They are viewed as an opportunity to cash out via IPO and maybe turn the reins over to someone else.

But that framing misses something important.

So, what lessons can small business owners, entrepreneurs, and early-stage investors take from the public markets?

Capital allocation, widening the moat, and stewardship aren't just public market concerns - they are core requirements of any business built to last.

In late October, I shared this perspective with Northern Kentucky’s startup community at SparkHaus - a beautiful new entrepreneurship hub and coworking space in Covington.

(Please note that this presentation was given under the KNA Capital Management banner, my Ohio-registered RIA. See important disclaimers.)

The lines between the public and private markets are increasingly blurred, and both sides could learn something from the other. Having studied the public markets for over 20 years, I focused my presentation on three key lessons for entrepreneurs and early-stage investors.

1. Identify your moat source: What is your unfair advantage? (If you can’t clearly answer this, your competitors eventually will.)

2. Reinvest capital intentionally: Widening the moat is what ultimately drives higher valuations. (Growth + moat expansion compounds cash flow over time.)

3. Embrace stewardship: Ensure the business can thrive beyond your tenure. (If it depends entirely on you, it isn’t durable.)

The companies that endure and compound value over time are the ones that execute on these principles.

Two of my favorite slides featured historical examples from two of our region’s most successful businesses: Procter & Gamble and National Cash Register.

While these examples are over 100 years old, they illustrate that moats aren’t just for blue chip, publicly-traded companies. Their success began long before a single share traded on an exchange.

What stood out to me about P&G and NCR wasn’t just their success, but their founders’ intentional approach to value creation. They identified their moat sources early and relentlessly invested behind them. They doubled down on what their competitors couldn’t replicate and widened the gap over time.

Finally, we talked about how moats crumble in the public markets and lead to impaired valuations.

Contrary to popular belief, competitors don’t destroy moats - they expose the damage that’s already been done.

Moats actually crumble from the inside-out.

The opportunity for competitors to attack starts with internal complacency or misaligned incentives.

The fastest way to destroy your successful business isn’t external competition, it’s “mortgaging your moat.” Companies can mortgage their moat by failing to provide enough consumer surplus (the gap between their product’s price and the consumer’s perceived value).

Ultimately, the public markets offer business owners and investors at all stages timeless lessons of what creates and destroys value.

Using these three lessons, small business owners and private market investors can increase their business’s value - and potentially become public market success stories themselves.

You can view the full presentation here:

KNA Capital Presentation: Lessons from the Public Markets

1.52MB ∙ PDF file

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It was a privilege to share these lessons with the Northern Kentucky startup community. If you're building or allocating capital and thinking about the durability of your business, I’d welcome the conversation.

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Stay patient, stay focused.

Todd

Todd Wenning is the President & CIO of KNA Capital Management, LLC, an Ohio-registered investment advisor that manages a concentrated equity strategy and provides other investment-related services.

At the time of publication, the author, his immediate family, and/or KNA Capital Management, LLC or its clients do not have positions in any company mentioned.

Please see important disclaimers.

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At the time of publication, the author, his immediate family, and/or KNA Capital Management, LLC or its clients have positions in First Watch Restaurant Group.

Please see important disclaimers.

It’s been a tough March for many stocks, but a handful of previously profiled companies here at Flyover Stocks have had a particularly bad few weeks.

The following have all lost at least 20% of their value over the past month.

• Grocery Outlet (GO)

• YETI Holdings (YETI)

• Cavco Industries (CVCO)

• Donaldson (DCI)

• First Watch Restaurants (FWRG)

• Rotork (LON: ROR)

• Installed Building Products (IBP)

The common themes are exposure to consumer spending (GO, YETI, FWRG), housing (CVCO, IBP), and heavy industrial (DCI, ROR), all of which have shown weakness in recent weeks due to elevated interest rates, rising fuel prices, renewed tariff concerns, and higher expected inflation rates alongside declining wage growth.

What’s notable isn’t just that rates are high - it’s that multiple pressure points (fuel, utilities, financing costs, etc) are hitting at the same time, compressing discretionary spend faster than headline inflation suggests.

Here are some charts illustrating these trends:

US consumer confidence is shaky and that’s starting to show up in some of these results. Discretionary purchases like $200 coolers (YETI) and boozy brunches (FWRG) are harder sells when gas prices are spiking and utility bills outpace wage growth.

The math is straightforward - as non-discretionary expenses increase as a percentage of your paycheck, there’s less money left over for discretionary purchases. First Watch reported a 1.9% drop in fourth-quarter traffic and YETI noted a cautious wholesale environment as retailers don’t want to load up on inventory right now.

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That same pressure is bleeding into housing demand as well, which is affecting Cavco and IBP - two companies that depend on new home construction activity.

The shaky consumer confidence environment should benefit Grocery Outlet, which sells overstocked grocery items at discounted prices, but the company has some operational troubles which have contributed to the recent drawdown. It’s been in the “penalty box” for the past year as I no longer think it qualifies as a Flyover Stock from a quality perspective. That said, I think it’s worth a closer look for turnaround-oriented investors.

Donaldson and Rotork are both in “transformational” periods, aiming to better line up their businesses for what they believe is the next phase of industrial project demand. Donaldson is preparing for a surge in power generation projects. Meanwhile Rotork’s “Growth+” strategy has been hamstrung by some deferred capital projects in midstream oil and gas due to geopolitical uncertainty and more restrictive financing.

With the exception of Grocery Outlet, I continue to believe these are six quality companies facing some cyclical rather than secular headwinds. In each case, the question isn’t “Is demand gone for good,” it’s, “When does it normalize, and what does the business look like when it does?”

Not all of these drawdowns are equal - some offer compelling opportunities for further research right now.

I’ve re-ranked all six based on research priority - and one name surprised me.

All paid subscribers (Flight Crew + Hangar), your content continues below.

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“You just got lesson number one: Don’t think. It can only hurt the ball club.” - Bull Durham

The 1995 Cleveland Indians (now the Cleveland Guardians) baseball team is regularly listed as one of the top 50 of all time. They had 100 wins and just 44 losses on the season. They led the majors in runs, hits, home runs, and batting average - just about every major offensive category.

In most years, they would have won the World Series, but they ran into the equally impressive 1995 Atlanta Braves who beat them four games to two in the finale.

The dominant 1995 Indians starting lineup recently made its rounds on Twitter and caused a lot of debate.

Most of the critique was regarding the placement of Omar Vizquel, better known for his glove than his bat, at second in the lineup. (For the uninitiated, the second hitter in the lineup gets more chances to hit each game and plays a strategically important role ahead of the “power hitters” in the third through fifth spots.)

“Moneyball” has since been introduced to Major League Baseball and there’s no way Vizquel would hit second in today’s game. He’d more likely hit eighth or ninth - and may not have even played at all despite his excellent defensive skills.

Today, baseball is fully optimized. Every pitch, every movement is charted, analyzed, and studied. Probabilities are determined to drive decisions. “Gut” feelings from managers are insufficient if the probabilities suggest the alternative.

And yet…this team won 70% of its games.

“Well,” you could argue, “That’s only because the other teams in the league were also unoptimized.”

That might count for a few wins, but even if the league were more optimized, this lineup would have still produced top quartile results.

That’s because it’s hard to be average when you are stacked with “right-tail” talent - that is, talent well above the population average. You could have organized Cleveland’s lineup a dozen different ways and they still would have done well.

This got me thinking about portfolio management. Are active portfolio managers over-optimizing their portfolios and missing the point, which is to own and hold what they believe to be “right-tail” stocks?

Jeff Ptak, Managing Director of Morningstar Research, recently studied the 100 largest active U.S. stock funds. He compared their actual 2025 performance against a hypothetical "Do-Nothing" portfolio, which took the funds' exact holdings from the start of the year and simply froze them (no buying, no selling) for the next 12 months.

What he found was that the funds’ stock picks beat the market, but their portfolios did not.

Ptak took this even further, testing the hypothesis over a longer time period, and the result was much the same. In nine of the last 10 years, the “do nothing” portfolios did better than the actual fund results.

Put differently, portfolio managers as a group traded their way out of better performance, presumably to optimize their portfolios.

Just as is the case with Major League Baseball, there are good reasons for portfolio managers to optimize and consider risk-adjusted probabilities and payoffs. There are also times where selling is absolutely the correct decision, even if the outcome turns out to be suboptimal.

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But we can also trade not because the business changed, but because the portfolio’s lineup looked messy on a spreadsheet. We might bench our home run hitters just as they’re getting into a rhythm, usually to satisfy some volatility constraint or a rebalancing rule that has nothing to do with the company's actual compounding power.

The right-tail of the stock universe is, by definition, limited. And as Henry Bessembinder’s data shows, only a fraction of stocks account for the majority of the stock market’s returns.

If we believe our process increases the likelihood that we are identifying right-tail stocks, then, we should also err on the side of not selling or trimming them in order to “optimize” the portfolio.

Given the way the math works, one right-tail stock held patiently can make up for a lot of sub-optimal decisions.

Sometimes we need to get out of the way and let the team play. Or as my kids would say, “Let them cook.”

Stay patient, stay focused.

Todd

Todd Wenning is the founder of KNA Capital Management, LLC, an Ohio-registered investment advisor. KNA Capital Management manages a concentrated equity strategy and provides other investment-related services.

At the time of publication, the author, his immediate family, and/or KNA Capital Management, LLC or its clients own shares of Morningstar.

This profile is for informational purposes only and does not constitute personalized investment advice or a recommendation to buy or sell any security.

Please see important disclaimers.

I’ve looked at a number of them over the last year and all their EV/EBITDA and EV/Sales charts tend to look something like this:

At their peak multiples, some of these businesses were priced to perfection. Investors assumed that continued high rates of earnings growth were inevitable.

Expensive quality has a dark side, however. When reality doesn’t match up with rosy implied expectations, the halo around a company fades and the shareholder base can turn from accommodating to skeptical. In some cases, it can even turn hostile.

But as any business owner knows, business isn’t always up and to the right. Reality doesn’t always match the expectations of others.

When fallen angels lose their halos (their multiples) but not their wings (still fundamentally strong), it can provide attractive opportunities for patient investors who have been waiting to buy at better prices.

The first quarterly Flyover Stock company profile takes a closer look at one of these fallen angels. This company still generates gobs of free cash flow, has a stewardship-minded management team, and stands to benefit from attractive long-term tailwinds.

(Oh, and it’s not a tech company.)

With a 6% free cash flow yield and zero financial debt, it’s a good time to take a fresh look at the opportunity.

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At the time of publication, the author, his immediate family, and/or KNA Capital Management, LLC or its clients have no positions (long or short) in the companies mentioned below

Please see important disclaimers.

In this edition of “stocks on my radar” I will highlight three overlooked or misunderstood businesses with forward P/E ratios well below the S&P 500’s 22x current forward P/E.

Each of these companies trades with a forward P/E of 11 or less - half that of the S&P’s. While they have enough quality factors to merit research, there’s a reason each of them are trading with those low multiples, so we’ll consider both the positives and the negatives.

• First, we’ll look at a global customer experience operator quietly benefiting from AI-driven complexity rather than disruption.

• Second, we’ll consider a spun-off healthcare supplier with durable cash flows masked by near-term dislocation.

• Finally, we’ll analyze a niche industrial franchise emerging from legacy overhangs with improving capital allocation discipline.

The AI-driven research platform Tenzing MEMO is a tool I use for efficiency gains in my research process. As a solo investor, using Tenzing MEMO has helped me accelerate the initial research phase on new ideas and keep up with existing coverage by quickly synthesizing information.

Disclosure: Tenzing MEMO is a commercial partner and sponsor of this newsletter. I receive compensation or benefits if readers sign up using the promotional code. This section is an advertisement.

Nick and Tom at Tenzing MEMO are offering an exclusive trial for professional investors who use the FLYWITHUS code during signup. This code provides an extended 4-week trial (versus the standard 2-week trial) and six tickers to sample (versus the standard four).

I’ll feature some of Tenzing MEMO’s insights in this post alongside my own analysis. If you’re a professional investor interested in exploring its capabilities, you can find more information about the offer here. Please remember to use the FLYWITHUS code when you sign up to access the enhanced benefits.

IBEX Limited (IBEX)

In recent months, IBEX has regularly showed up on various screens I run. In my experience, that’s been a good signal that it’s time to take a closer look. There has to be something worth learning about.

My first job out of college with Vanguard was essentially a customer service role. I was a licensed registered representative, but the job was really about talking with 60 customers a day and helping them solve everything from simple to highly complex problems.

Having experienced the nuances involved in various customer service scenarios, I have a hard time believing that it will be fully replaced by AI anytime soon.

In other words, we’ll be saying “rep-re-sen-tat-ive” into our phones for many years to come.

Properly used, AI should empower the human customer service agents we work with to get better at solving the problem at hand.

In recent years, Washington, DC-based IBEX has pivoted from being a standard outsourced call-center company to fully integrating technology into the process. With 97% of its on-site workstations located outside of the U.S., the combination of lower-cost labor and technology can better serve clients and their customers.

Customer service is a high turnover job. Getting yelled at half the day is draining. But IBEX has strong employee Net Promoter Scores (eNPS of 77) and high employee retention. It also appears to delight its clients, boasting a client eNPS of 71 and 98% client retention. As the above chart shows, these intangibles are showing up in the numbers.

But are the numbers durable? I asked Tenzing MEMO to help me determine IBEX’s primary moat source. It highlighted IBEX’s cost advantage and noted the following:

• Delivery footprint tilted to lower-cost geographies. IBEX runs the vast majority of its operational capacity in offshore/nearshore markets (Philippines, Pakistan, Jamaica, Central America), and management disclosures show this mix has been increasing (e.g., ~97% of workstations outside the U.S. as of FY2025). That’s a structural labor cost advantage in a labor-heavy business.

• Mix shift to higher-margin offshore work has been a key driver of margin expansion. In the FY2026 Q2 period (ended Dec 31, 2025), IBEX explicitly attributes improved margins to growth in higher-margin offshore regions; the 10-Q also discusses how shifting work from onshore to offshore tends to raise margin % even if it can reduce absolute revenue dollars.

• Process + utilization leverage. Contact centers have meaningful fixed costs (sites, supervision, IT). Higher utilization improves unit economics. IBEX disclosures emphasize utilization and “site optimization” as a margin driver.

Critically, however, Tenzing MEMO added a key caveat:

• In BPO [business process outsourcing], cost advantage is often shared across many competitors (everyone can operate in the Philippines, etc.). So this tends to be a “relative execution” advantage (who runs it better) rather than a hard structural barrier.

That’s important to keep in mind. With sufficient funds and time, it’s possible that someone could replicate the model. Replicating the culture could be more challenging, however. The low-cost advantage paired with a track record of delighting employees and clients might make IBEX more difficult to compete against than the average outsourced BPO.

Could a pure-play AI customer service offering fully disrupt IBEX? Maybe in time, but I continue to believe that there are certain situations where speaking with an actual human (supported by AI) will continue to be the superior brand interaction for both the customer and the client.

With a trailing 7% free cash flow yield, IBEX is worth a closer look. The next step in my research process would be to better understand its customer concentration risks. The top 25 customers account for 79% of revenue and the largest customer accounts for 10% of revenue. The loss of any one of these customers could be material.

Premium Flyover Stocks subscribers have exclusive access to the other two stocks on my radar. The content continues below.

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Trying a different format for this post. Here are 13 recent thoughts I’ve had about investing.

1. Moat depth is more important than moat width. Investors tend to be enamored with wide moats, but a defensible narrow moat is more valuable than a wide moat that’s only an inch deep.

2. Many SaaS companies treated their customers like a captive audience and raised prices faster than they were adding customer value. In other words, they mortgaged their moats and made them less defensible.

3. The mark of a seasoned investor is to hear a contrary opinion from a respected investor and take it seriously enough to reconsider, but not so seriously that you outsource your judgment.

4. Trying to intentionally underperform the market is just as difficult as intentionally outperforming it, but if you’re going to try, concentrating in a handful of expensive quality stocks with low-single-digit growth rates is a good place to start. (See quality traps)

5. You always want to be an investor and not simply a collector of businesses. Great companies do not always make great investments.

6. Win Murray, director of research at Diamond Hill, recently told my students at the University of Dayton that the more restrictions you put on your investment approach (e.g., only buying “U.S. quality value”), the harder you’ll find it to outperform. Our goal is to find mispriced securities - we should go wherever value opportunities exist.

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7. While some types of restrictions diminish opportunities for outperformance, I have found, on a valuation-neutral basis, that the surface area for good luck improves dramatically when you own great businesses than owning mediocre ones.

8. I’d rather fish alongside other anglers in a river that has some trophy fish than alone in a stream full of minnows. What matters is what you might pull from the water.

9. Dividend track records mean very little. If you had argued in 2016 that over the next decade, Diageo, Walgreens, and 3M - three blue chips with multi-decade dividend growth streaks - would cut their dividend no one would have believed you.

10. The capital cycle remains undefeated.

11. As AI content increases, demand for authentic content increases. Look toward companies producing or distributing content rooted in real human experience that cannot be synthetically replicated.

12. Learning about the world’s best businesses regardless of their present valuations plays a critical role in building pattern recognition skills.

13. Every great company goes on sale at some point. The better you understand the company’s DNA, the more likely you are to capitalize on irrational drawdowns.

Flight Crew members, your content continues below.

Stay patient, stay focused.

Todd

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Year-to-date, the S&P 500 (measured by SPY) is up 1.1% - seemingly placid - but that’s not because companies and sectors are uniformly inching higher.

Michael Batnick of Ritholz Wealth Management recently shared this chart, which showed that over eight recent trading days, over 115 S&P 500 stocks lost more than 7% of their value. Historically when this has happened, it’s driven the S&P much lower (down 34% on average), but it’s barely registered a blip so far in 2026.

That’s due in part to the fact that while software and data providers have been crushed (accounting for many of the aforementioned drawdowns), other sectors like energy, industrials, and materials have rallied.

When COVID hit the US in March 2020, the team I was on had multi-day late-night sessions reviewing the potential impact on each one of our portfolio holdings. We asked, for example, how long a company could last without revenue before it would be impaired. This was a real possibility, however temporary, for some companies during COVID.

I think many investment teams around the globe have been conducting similar stress-testing exercises related to the rapid advances in AI.

• How real is the terminal value threat to each of our holdings?

• Is the company’s pricing power permanently impaired?

• Will this company be as relevant in 10 years as it is today?

Judging by some of the drawdowns we’ve seen in software this year, it seems many investors might even be selling first and asking these questions later.

But what do you do with the capital you’ve raised from selling perceived AI-losers? The natural answer is to move it to companies with little to no AI risk - energy, materials, industrials.

This type of sector rotation has opened up some buying opportunities. While most of the 30 Flyover Stock company profiles were not from the technology sector, here are four that I think are most worth your research time right now.

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