Today, ABB announced it plans to acquire Rotork in an all-cash deal at 503 pence per share, valuing Rotork at roughly $5.5 billion in enterprise value - a 73% premium to the previous day’s close.

Profile summary

Like every other Flyover Stocks profile, the Rotork report wasn’t a “buy” call. Using my moat, management, and forecastability framework, Rotork scored 3.0 out of 5, or middle of the pack relative to other companies I’d profiled.

That said, most of the demerits were due to a relatively new management team and low relative forecastability and simplicity scores, with Rotork selling into the oil & gas industry.

The moat, however, I found to be quite impressive - it scored a 4 in Moat Width and Depth.

A few things stood out enough to write about in January 2025:

• Deep switching costs / cost of failure avoidance. Rotork’s actuators are a small fraction of the cost of the systems in which they’re installed, but failure is expensive. Once installed, customers don’t swap them out on price alone.

• Best-in-peer-set returns on capital. At the time of the report, Rotork’s ROIC (~21%) was meaningfully ahead of the group I compared it against, including ABB (the acquirer), Emerson, and Flowserve.

• A valuation that didn’t match the fundamentals. Rotork was trading at the bottom of its peer group on P/E and EV/EBITDA despite having margins and returns near the top of the group.

• A newer leadership team not yet getting credit. CEO Kiet Huynh’s “Growth+” strategy was showing early results (double-digit revenue and profit growth in H1 2024) but hadn’t fully changed the market’s mind yet.

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What surprised me

In the profile, I also flagged real reasons for caution, such as heavy oil & gas cyclicality, a run of management turnover through the 2010s, and low forecastability given currency and end-market swings. These factors kept me from buying the stock myself, along with the fact my portfolio was already overweight industrials.

Save a spike in the share price following the start of the US-Iran conflict, Rotork’s stock had been lackluster at best since last January, and multiples fell further recently as oil prices returned closer to pre-conflict levels.

I’m less surprised that Rotork was acquired by a strategic buyer than I am the multiples ABB paid for Rotork - 5.3x revenue and 19.5x EBITDA, which are a considerable premium to the 20-year averages of 3.6x and 14.8x, respectively.

I would not have used those multiples to determine a fair price, but I noted in the original profile that:

Good on Rotork for getting such an attractive offer. I’m not sure if there was an active auction for Rotork, but given the huge premium, I suspect there were competing bids.

The takeaway

I don’t write these profiles as buy recommendations. I write them to find durable, underappreciated businesses that I should keep on my radar. Writing them forces me as a portfolio manager to regularly compare the prospects of my current holdings against new ideas I may not have previously considered.

While Rotork didn’t find a place in my portfolios, this is a decent reminder that the gap between good business and cheap stock doesn’t stay open forever.

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 plan on writing a more comprehensive note on my experience in Italy, but I wanted to share some initial thoughts with premium Flyover Stocks members.

The weather has been brutally hot for weeks with only a trace amount of rain. As an American, it's been clarifying to see the European respon…

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Suffice it to say, I’ve thought a lot about dividends over the years.

Early in my career, I was greatly influenced by research on dividends, including Robert Arnott and Cliff Asness’s paper on how higher dividend payout ratios led to faster earnings growth, and Jeremy Siegel’s book The Future for Investors, which showed that many of the best performing stocks from the previous half century were generous dividend payers.

Dividend investing meshed well with my conservative nature and with the quality-value approach that I was developing.

Here are some of my key takeaways from my research:

• Companies need cash flows to pay dividends, not GAAP accounting opinions.

• To increase the dividend, boards need to be confident in the company’s ability to generate more cash flows.

• Growing dividends are suggestive of a competitive advantage, since the board must be confident in the company’s ability to generate higher future cash flows.

• Growing dividends indicate the board’s interest in sharing the company’s prosperity with shareholders.

• Dividends reduce the size of the management’s sandbox, forcing them to be more focused with capital allocation decisions.

The goal of dividend investing, I concluded, was to build a well-diversified portfolio of well-covered dividend-paying stocks with a targeted yield of 3-4% and free cash flow per share growth of 6-7%. Over time, this would produce market-like returns with less volatility.

10 years ago, this seemed achievable, though I sensed a change on the horizon, which is why I titled the book Keeping Your Dividend Edge.

In the book’s conclusion, I wrote:

In theory, all of these lessons I took from dividend investing remain valid today. But holding onto the “edge” that dividend strategies offer has become less secure. The environment changed in three important ways that make dividend investing as described above impractical going forward.

Disrupted consumer staples

For one, many of the consumer staples giants that served as anchors in high-dividend yield portfolios have been challenged in an age of advertising disintermediation and GLP-1s altering consumer behaviors.

These dynamics have shown up in consumer staples dividend growth rates.

Consider the declining three-year trailing dividend growth trends for Coca-Cola, Colgate-Palmolive, J.M. Smucker, and Clorox - four “Dividend Aristocrats” that have grown their dividends each year for 25+ years.

For years, dividend investors could rely on big consumer brands to be defensive and consistent, but the rise of influencer marketing and private label (e.g. Costco’s Kirkland) and GLP-1s have changed the game. What’s more, these disruptive factors have forced a change in capital allocation priorities. But with each of the above stocks - and many more in the sector - paying out 75% or more of their earnings in dividends each year, the CFOs are handcuffed when making allocation decisions.

A slashed dividend by an Aristocrat would not only confirm there’s trouble but would also mean the stock is dropped from many high-AUM dividend-focused investment pools. As such, boards are reluctant to make the call, even if it’s the optimal long-term strategy.

(As an aside, I roll my eyes when I see Aristocrats raising their dividends by one measly cent to avoid being kicked off. Colgate-Palmolive, Sysco, and Stanley Black & Decker have all done it in just the past year. I can't think of a better sign that a board is worried about the dividend, hoping the company catches a break to rebuild its stretched coverage ratios before the next review.)

Liquor companies, which were supposed to be the ultimate defensive consumer staples category, have run into hard times post-COVID. Even five years ago it would have been unthinkable that Diageo - owner of the Johnnie Walker, Guinness, and Tanqueray brands - would cut its dividend anytime soon, and yet that’s exactly what happened earlier this year.

Changing board dynamics

Since 1982 when SEC Rule 10b-18 passed (allowing companies more freedom to make share repurchases), there’s been a material shift in how companies prefer to return cash to shareholders.

Indeed, for most of the past decade, the S&P 500’s buyback yield had exceeded that of the dividend yield.

Compared with dividends, which in the US comes with an implicit commitment to pay at least as much in subsequent years, buybacks offer more flexibility. In tough times, the company can retain cash. If the stock is cheap, the company can buy stock and increase the ownership slice of ongoing shareholders.

Indeed, in the hands of a skilled allocator, buybacks are preferable to dividends. The opposite is also true, of course. Poor allocators can destroy value with buybacks if they are overpaying for shares.

In taxable accounts, buybacks are more tax efficient than dividends. Dividends are taxed when paid while capital gains are deferred until a sale. Naturally, this demands prudent asset location from investors and advisors to hold low- or no-yielding compounders in taxable accounts while sheltering higher-yielding stocks inside qualified accounts.

As board members of public companies cycle in and out, the memory of pre-1982 capital allocation priorities fades. To illustrate, the average age of new board members is 59. This group would have been 15 years old when SEC Rule 10-b 18 passed.

Consequently, as time passes, boards become more comfortable with buyback-first capital allocation policies. The case for dividends becomes an uphill battle, especially at firms without a long dividend paying history.

Even the 1% buyback tax introduced by the 2022 Inflation Reduction Act may have had a small initial impact on buyback activity as companies weighed the costs, but buyback activity has resumed its pre-IRA trendline.

In short, the buyback train keeps rolling. Save some massive government policy change, it’s hard to imagine it slowing down anytime soon.

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The rise of technology

Since the 1950s, the average age of an S&P 500 constituent has declined from 57 years to 15 years. This trend is due to a number of factors, including disruption, failure, acquisition, and younger, rapidly growing (mainly) technology companies kicking out slower more mature businesses in the index.

Over the last decade, for example, exits from the S&P 500 include Campbell’s (founded 1869), Newell Brands (1903), Macy’s (1858), Xerox (1906), and Harley-Davidson (1903), all of which at one point in their histories had generous dividend policies.

Younger companies that replace these names tend to be in their high-growth phase where dividends are naturally less attractive. Further, the companies did not exist in an era where shareholders preferred dividends. There is little incentive for them to start paying one now.

AI only throws kerosene on this trend. Powered by AI, companies can be started faster than ever, challenging today’s mature companies to defer dividends into reinvestment to keep upstarts at bay. Similarly, established competitors looking to take back share can use AI tools in new and creative ways to disrupt the status quo.

Younger companies also increasingly use buybacks to offset the increased use of stock-based compensation, which has become increasingly prominent among the growing technology sector, as illustrated in this paper by Michael Mauboussin and Dan Callahan.

As long as companies see SBC as a key part of employee compensation, they’ll need to divert free cash flow toward offsetting SBC’s dilutive properties. This reduces the amount of free cash available as dividends to shareholders.

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Putting it together

The dividend investing world that existed 20 years ago is long gone and I don’t think it’s coming back.

To be sure, distributing cash a business can't productively reinvest hasn't died at all, but the preferred mechanism for returning cash has shifted away from dividends and toward buybacks.

This isn’t to say that dividend investing strategies won’t find success, but they will require investors and managers to select from an ever-smaller set of companies committed to returning generous amounts of free cash flow each year in the form of cash payouts.

Consequently, investors drawn to dividend investing will need to adjust, if they haven’t already.

Focus on the way management allocates all of its cash flow.

• Track record: Does management have a history of using cash opportunistically or pro-cyclically?

• Reducing or diluting: If the company buys back a lot of stock each year, is it actually reducing the share count or just diminishing the impact of SBC dilution?

• M&A discipline: Have acquisitions been prudent or does management have a history of taking regular restructuring or impairment charges?

Focus less on the company’s history and more on its ability to adjust to change.

• Balance sheet strength: Does the company have a strong balance sheet to respond to new opportunities and stay focused on long term strategies in times of change?

• Moat stability: How wide is the company’s moat and does it give management time to respond to new threats?

• Corporate culture: Is the company’s culture flexible and adaptive or are the hallways filled with people doing the bare minimum?

Be mindful of mental accounting

• If you own a company that’s buying back a percentage of its shares each year, why not sell off that percentage of your holdings to generate income?

Nothing in markets stays the same forever. For over a century, dividends were the primary means for companies to return shareholder cash and many mature businesses’ capital return policies were developed during that time.

That’s no longer the case. Any company that’s gone public since 1982 in the US has had free use of buybacks as an alternative. Global competition has never been more intense and boards are reluctant to implicitly commit a large percentage of earnings when they may need the capital to respond to changes.

It’s true that dividend yields would naturally become more attractive if the market sharply sells off; however, that doesn’t mean dividend investing would be back.

Given what we discussed so far, such a downturn would provide boards that are already anxious about their current dividend policy the cover they need to cut their current payouts. We saw some of this behavior during the financial crisis - Dow Chemical, Pfizer, General Electric, to name a few. Their distinguished dividend-paying heritages didn’t mean anything. If dividend cuts become acceptable in a certain window, companies with stretched policies can seize the opportunity to reevaluate.

Bottom line

I’ll reiterate that all the positive attributes of dividend investing I mentioned in the bullet points above are still true. In theory.

But dividend investing, as I knew it and loved it, is dead.

Destroying your best-loved ideas, using Charlie Munger’s phrasing, is not an easy thing to do. The ideas were best-loved for a reason. But times change, and so must we.

Stay patient, stay focused.

Todd

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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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.

It’s been nearly 15 years since I was last here, and, despite the heat wave, it’s clear that I need to visit much more often. There are too many great places to see and great people to meet in just a week.

The heat emergencies and family duties changed some plans, so if I missed you on this trip, I do apologize and hope to see you soon on my next journey here.

A Flyover Stocks meetup would also be more amenable in better weather and there aren’t World Cup match conflicts…

One of the highlights of this trip was that a friend and I met with Howdens Joinery in their Central London offices.

I was hoping we might get to meet with CEO Andrew Livingston or CFO Jackie Callaway, but the DIY Kitchens acquisition closed that morning and the RNS went out during our meeting with IR.

As such, I was grateful they kept the meeting despite the major press release going out.

We were also grateful for the hour in an air conditioned office!

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 Howden Joinery.

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

Past performance is no guarantee of future results.

Please see important disclaimers.

It might be an odd strategy, but I don’t take notes during in-person meetings. I understand why others do and recognize it’s superior in some ways, but I’ve found that note-taking changes the dynamics of a conversation and can make the other party more circumspect.

Many years ago, I listened to a famous journalist who also didn’t take notes say, “The good stuff sticks.” And I’ve found that to be true. You remember the important things.

That aside, I wrote down my thoughts from the meeting on the sweltering Tube ride home.

• The DIY Kitchens acquisition was opportunistic. Importantly, there wasn’t an auction process. The DIY Kitchens family owners were aging and wanted to put it in good hands to someone with an aligned focus, rather than sell to a private buyer who might strip it down or load it with debt.

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Below are 50-word updates on every one of them: what's changed, what hasn't, and what I'm watching.

The full list of profiles lives here. Free readers get the first several updates; the rest is for paid subscribers.

Medpace (MEDP)

A year ago, it seemed that Medpace’s backlog was finally building traction, but it has stalled in recent quarters. Q1 2026 book-to-bill came in at 0.88x, meaning the company’s burning backlog faster than it’s replacing it. Medpace’s president also announced his surprising resignation at Q1 results, adding to uncertainty.

Grocery Outlet Holding (GO)

New CEO Jason Potter (formerly of The Fresh Market) closed 36 underperforming stores, is refreshing 150 more by year-end. Early refreshed-store data is encouraging, but GO’s comps have been flat despite a struggling lower-income consumer - precisely when GO’s model should be shining.

Miller Industries (MLR)

Distributor destocking crushed 2025 revenue, leading to optically high multiples that mask potential value. Omars acquisition added a third European manufacturing facility. Over $150M in military commitments secured, with production beginning in 2027. A $100M plant expansion is underway in Tennessee, suggesting management’s confidence in a recovery.

Worthington Enterprises (WOR)

The Elgen acquisition (HVAC components) sharpened the Building Products identity and management has focused on allocating capital to that segment. Consumer Products faces tariff headwinds and lacks a clear moat source. WOR continues to heavily rely on its WAVE JV, which usually accounts for ~40% of adjusted EBITDA. Management not having direct influence over 40% of the company’s profitability is a risk.

Hawkins Inc. (HWKN)

Six acquisitions in nine months, including five in the water treatment space. The logic of consolidating a fragmented, recurring-revenue water treatment market is compelling. Its acquisition of WaterSurplus is a potential game changer, as it moves Hawkins toward water treatment solutions that don’t rely on chemicals.

Cavco Industries (CVCO)

American Homestar added manufacturing capacity and retail distribution simultaneously. FY2026 produced a record number of homes sold. Capacity utilization approaching 75%. New $150M buyback authorized. Stock has held up well despite cooling new residential construction market.

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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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