Todd Wenning on Flyover Stocks and Small Cap Moats $GMWKF, $ODFL, and $CPRT | S07 E43

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I think that means we're live. This is Value After Hours. I'm Tobias Carile joined as always by my co-host Jake Taylor. Our special guest today is Todd Winning, KNA Capital Flyover Stocks. How are you Todd? >> Doing great. Thanks for having me. >> Pleasure. Tell us a little bit about KNA flyover stocks. What's the what's your focus there? What's your philosophy? Yeah. So, uh, Flyerstocks is a blog that I started in fall of 2023. Uh, when I was at Morning Star, I did a series called Seeking Small Cap Moes that proved pretty popular and I kept getting emails about it for years after I had left Morning Star. And so, I figured when I started a Substack, I was going to focus on around the same thing. So, Flyers Stocks is focused on companies that I think are are quality uh that are that are worth looking into that may not have a lot of analyst coverage that I find particularly interesting that may have an economic moat led by good managers. So, that's that's the that's the context of Fly Stocks. KN&A Capital is my Ohio registered RAIA uh where I I help people uh manage money and I have a uh equity strategy called the core equity strategy that I use to employ my investment philosophy. So there's a lot going on but I'm [clears throat] enjoying it all. >> Do they have to be Midwestbased uh companies for to qualify as flyover? >> Uh some uh some are in like the Southwest. I have some UK companies as well, but generally speaking they're names that people don't know very well. And then how about teaching that you do I know at uh at Dayton. >> Yeah. So on top of Fiverr Stocks and KN&NA Capital, I'm also a uh a lecturer at the University of Dayton where I teach finance. I teach uh right now I'm teaching intro to finance and I also teach a class called applications of sustainable investing which integrates some ESG things but also thinking about economic modes and what makes companies durable and sustainable. So I try to bring in sort of the buffet approach thinking about moes and great management teams and how they all integrate together. So it's uh I'm staying pretty busy these days but the semester is wrapping up soon and I'll have a little little break here. So that's one perk of teaching university classes is that you have some extended breaks along the way. >> Let's talk about small cap moes. How do you find asking for a friend? How do you find small [laughter] cap modes? Yeah. So, smoking small cap modes, there's a lot of similarities with large cap modes. It's thinking through sort of the the five frameworks that Morning Star um had had taught me, which are switching costs, network effects, lowcost production, intangible assets, and efficient scale. So, trying to put the companies in one of those five buckets or more. Some companies have switching costs and network effects for example. And those are those are really the gold mines where you can find uh two moat sources which makes them really difficult to compete with. And really when you find these these small companies what differs them from the larger companies is maybe growth runway. They may not have a huge addressable market but they have a nice niche market. They can generate strong returns on invested capital. So, I'm looking for all the same factors that I do with large cap companies, which are high returns on invested capital, uh predictable free cash flow, predictable revenue growth, uh all the things I'm looking for in the large cap. Uh there are also some in the the small cap world. Now, sometimes the the big difference might be sort of the quality of the management team. So, I do a lot of work uh looking into those as well, trying to figure out if they are smart capital allocators or uh if they're perhaps um not up to not not to snuff in terms of their ability to to grow the business uh long term. >> Does that tend to be uh where thesis breaks down is it's a decent little niche business and it's earning, but then the cash is kind of being squandered potentially by bad cap allocation. >> Yeah, that that's a common theme that I see. Uh, and it can also be one that just puts me off on the company. Um, now there are companies that are that are real exceptions to that. They just have a really niche business and management's happy to grow the business at a at a decent rate. Uh, but there's other companies where you run into small cap managers where they don't have a large ownership position or maybe the financial incentives are misaligned and they're just not or perhaps not equipped uh, strategically thinking about how they can move their business into new markets. Perhaps they're, you know, they they want to grow, but maybe they do it in the wrong way. Maybe they do an acquisition or they get acquired and they're not really thinking about the the small shareholders in those situations. I'm sort of surprised that that small cap modes still exist because it feels like if if something is has a moat then it should be growing into mid or large cap world should be passing through smalls and uh anything that sort of lives in small cap world is a little bit like economically disadvantaged which is why it's a small cap in the first place. >> What uh >> how do you that? >> Yeah. >> Yeah. Sorry. Go. >> No. Okay. Um, you know, thinking about just going back to the Buffett analogy, the the initial moat analogy, which is the moat is there to protect the castle, right? The economic castle, and that's supposed to be led by a virtuous knight who's looking to expand the castle. Uh, and the moat is really there just to protect the steward's ability to to grow the castle. So, the moat itself can be thought of as a separate issue from the growth runway or the or the the size of the potential castle. It's just a structural moat that protects what's going on inside the castle. Now, it's up to the management team to figure out, hey, how can we maximize this opportunity that we have and what the moat does is just give those managers time. Uh, but some, you know, you might have some businesses that have huge growth runways and huge reinvestment opportunities. And the castles can become very, very big. But there are also companies like small companies that um maybe just have a niche. And it's a nice little castle, but it's not a huge gray castle that can become the next S&P 500 star, for example. >> Do you have any examples of names that sort of small cap but mighty? >> Sure. So, one of the companies that that we have in the KN&A Capital portfolio is a is a UK company called Games Workshop. And if if you're if you're a a hobbyist, if you un if you've ever followed Games Workshop, you know the Warhammer 4,000 40,000 uh brand. And so they make uh tabletop caricature games uh that are pretty intense. It's the most similar comparison is Dungeons and Dragons. I know I might get uh fried by by by the by the passionate Warhammer group for saying that there's like Dungeons and Dragons, but it's it's a similar concept and it's very an opportunity to create these deep narratives and and games workshop create. They have a publishing arm. So they create all these stories and they release new additions and new characters. They have new scoring systems. It just keeps it really fresh and interesting. Um, and so they are growing very nicely. In fact, they have a uh upcoming series on Amazon that's going to be coming out uh about that's led by Henry Caval uh the actor. He's apparently a huge Warhammer fan. And so they're going to be creating >> Superman plays Warhammer. >> Exactly. Exactly. He's a big hobbyist and big Warhammer fan. So they're creating all this IP around its movies and that's really taking it I think to another level which is why it's it's currently in the portfolio but it's it's such a niche business and that's their focus and if you read the annual letters which are great. I highly recommend reading their annual letters. You know you'd think with all this IP and this sort of the fantasy world that they'd have these glossy uh annual reports with all these crazy characters but >> old English. >> Exactly. Exactly. [laughter] But it's just like a word document and it's great. It reminds me a lot of of Bergkshire in that way. Um and the CEO uh Kevin Roundtree just speaks very plainly. Um talks about what their focus is and their goal is to create the the best games possible uh best characters possible and that's it. That's their focus and they want to continue doing that forever. Right? That's what their his phrase is. We're going to keep doing this forever. And so when I hear that phrase, that gets me interested. It's like this is something that I'm thinking about long-term beyond my tenure. That tends to be sign of a good of a good steward steward of capital. >> So what is the business? They own the Warhammer brand. It's not a retail location selling games. It's a >> Well, there are stores. I've seen them. >> Yes. Yes. So they do have stores um around the world. Um there's one in Cincinnati here where I live. Um there's they're most major cities. Uh, most of them are run by a hobbyist. So, they're single person stores and they're open from like 12 to 8, six days a week. And and >> it's like comic book man from the Simpsons. >> It's very similar. I remember my my my daughter and my son and I walked into one and everyone's kind of turned and looked at us like, who's coming in? >> New blood. >> New blood. >> Yeah. Right. Strange. Yeah. Yeah. I'm not one of you guys yet. Um, but it's it's it's a very addictive habit. Um, you know, I've told people that I I bought my first set of of Warhammer characters and it's really cool because you they're these little plastic figures that you can snip out and then you take the time to paint them. And so there's an IKEA effect, right, where you're building you're building and creating these characters and making them come alive and they're they're yours and then you can take them and play them against your friends and you can have these really ornate uh landscapes where the the games are happening. >> And a friend said, you know, you're crazy for starting this because it's a really expensive habit once you get I think the starter kit was about $65 for, you know, just the just the first set of of aliens and and humans um you know to fight each other. So, it's a it's an interesting interesting uh business model, but they have so they have retail shops. Um, and they have they business through third parties. So, if you just a general hobbyist gaming store, they may have uh the Warhammer games there as well. >> Any sense of like how much what's the annual spend on like the kind of power user? >> Yeah, there's definitely a power law um in effect here. I there's you know there's sort of the super players where the top 10% spend. I mean, it's it's would not surprise me if it's well into the five figures per year in terms of what the top decile of of spenders do play on, you know, because there's there's there's been a risk of 3D printing for a long time. You know, this idea that, hey, we can just, you know, replicate these these characters um using 3D printers. Um that happens a little bit around the periphery. Um maybe there's a really expensive character that someone just really wants to play with. Um, but generally speaking, you know, the hobbyists, I think, understand that if they don't give money to Games Workshop, what that's going to do is the whole world just sort of slowly fades. And so there's because Games Workshop also is engaged with the the publishing. They create the narratives in the world. So if you take them away, what do you what are you really left with? And so there's this there's this really good strong virtuous flywheel. I think that happens. That that phrase gets thrown around a lot. But, you know, when people enjoy um their their games, they want to play with other people, it creates community, in-person community, which is increasingly rare today, right? And so, I think generally speaking, people are seeking community, real physical community, and this is one way to do it. And anything that can do that today and be very profitable at it, that's that's a good place to be, I think. >> Have they done any video games? >> They do. They do license video games. Uh so if you have a Switch, you can buy Warhammer games on there as well. >> There there is a big Warhammer franchise where the Space Marines. Is that is that >> Yeah, those are like the quote unquote human uh characters. >> So that is that is part of that that is part of that universe, >> right? >> Okay, that's kind of interesting. And what what what sort of revenues uh market cap profitability margins what's all that look like? >> Uh so it's it's it's very small um relatively speaking you know certainly in the Nvidia world uh with it's well well short shy of that. Um it's a it's a fairly small company um still fairly niche uh I don't know what it is in pounds off the top of my head. Uh but it does a nice steady business. High returns on invested capital, high returns on um common equity. Uh, it's just a very very profitable little smidcap business. >> And um f Sorry, I'm getting some notes. Switch PC 5,000 games with GW IP per year. What's What's GW? >> Games Workshop. >> Games Workshop IP. Okay. >> Yeah. >> Interesting. And um what's the what's the up? So there's a movie upcoming with Henry Caval or a TV series upcoming with Henry Caval and you expect that to expand the the user base, >> right? I think it'll help people find the hobby which will then turn it into hey, you know, create new communities and then just the flywheel starts and continues. So they've had very successful results. Um, you know, there was an expectation a couple of months ago that maybe they were going to have a a tough comp coming into the second half of this year and they just had a trading update saying actually it's going to be a little bit better. Um, and you know there's a the licensing revenue is 100% margin. So anything that they do with you know Amazon or whatever whoever they license to goes straight to to profitability. So that's a really nice um sort of option that they have in the business >> that's traded locally under ticket GAW. >> Yes. And so you can buy uh the the pink sheet um or the OTC equivalent in the US if you don't have access to the to the UK market. But you know as with any small cap trading overseas, if you're going to buy it, use a limit order. Make sure that you're you're getting the best price possible. Does your portfolio look like th those kind of positions? Are you do you hold moti positions or do you hold some more cyclical stuff or can can a cyclical bey? Yeah, I think cyclical could be mod. And I think uh when they have down swings in their their industry, that's a good time to to pick them up because I think the modiest companies in a cyclical industry are the ones who are most durable and can continue to think longer term while some of their competitors are freaking out, maybe trying to drop price, trying to get volume in through, you know, cover those fixed costs while they can have a more long-term perspective. And I think one company in my portfolio that has been doing that and I think will uh continue to to to be strong in their industry is Old Dominion Freight Lines, which is a less than truckload company that has networks and nodes across the US. I think they're the second largest LTL uh freight company in the US behind FedEx Freight. >> What's LTL? >> Uh less than truckload. So there's two major types of trucking. There's truckload, which is what you might see um driving on the highway where they're taking one trailer from the shipper right to the end destination. So, point A to point B. Whereas LTL is where you're as a shipper, you rent or you you buy a part of the trailer. So, you might put a couple of pallets on a trailer at ODFL and they'll take it to their local service center or their warehouse where it'll be unpacked off the off the off the trailer, put on another trailer going to another destination with other products from other trailers. And so, it can get broken up and shipped. So, if you're shipping something from, say, Florida to Washington State, it might be on three or four different trucks that go along. So you're not just hiring one trailer to take you from Florida to Washington. It might be uh put on one truck, taken off, put on another one, so on and so forth. So having that operational efficiency um that really strong culture that Old Dominion Freight Line has uh to make sure that they are on time and there's no damage to the materials. You can you can imagine how many opportunities you have to break something when you're taking things on and off a trailer three or four times. And Old Dominion has a 99% um on time and less than.1% uh claims rate. So it's a very very small um breakage issue. And >> so what's the mode that you need a network of these depots and trucks around the country to sort of make it work, >> right? So think about if you had a billion dollars, let's say, to take on Old Dominion, uh it would be really hard to to do that in a reasonable amount of time. you know, first you have to build the service centers, you have to find the locations. And a lot of locations that ODFL has, they've had for for decades. So, they're in these population centers. Now, they've been built around. So, if you're trying to do that today, you're going to have a nimi effect where people don't want to have your your service center right in the middle of their their neighborhood. You got to go further and further out from the population center. So, ODFL has been uh benefited from these from these long long existing uh spaces where they're still in city centers and city approximates. Um and so you have to build find the real estate that's attractively placed. Um and then you have to find local orders, right? You have to find have salespeople who go out and and and try to get enough volume into your service center to cover those fixed costs. So, it's a very difficult process to to do. it takes a long time to do it. Uh, and you know, the the the returns on invested capital are are really nice, but they're not super attractive where you might throw out all the stops to to build these things, right? So, if if you come in and and you're saturating the market and dropping prices, that's going to impact everybody's returns on invested capital, including your own. So, there's a little bit of efficient scale um moat that happens there as well. So, what I what I chalk up their their moat to is it's kind of like a physical network effect. you know, they have these 250 or 260 uh nodes in their network across the country. So, they can get things from California to Maine in in two days, one day. And that would that's because they have these networks, these nodes in place across the country. And so, as they add new nodes, they can serve more customers. The the whole network becomes more and more valuable. And >> what's going on in trucking? Why why is it an interesting entry point here? Yeah, if you look at the trucking numbers, it looks like we're in a massive economic recession. You know, the the truck rates are um or were at least they've recovered a little bit, but they were kind of what you were seeing back in the financial crisis, just really bad uh numbers. And a lot of it had to do sort of this there's there's still these these COVID effects uh postcoid effects. So, there was this idea that uh during during COVID there was a trucking shortage, right? And so rates went up which brought in new drivers, some domestic drivers, some international drivers into the US market which created uh an over supply of drivers. So when the economy cooled a little bit, rates all came down and it got to the point in some cases where um it was more attractive uh from a cost perspective to rent to buy to get the whole trailer and take it from point A to point B than it would be to do an LTL shipment because rates just went that far down. Now, one of the things that that Old Dominion has that I forgot to mention was that they are preferred carriers to a lot of the largest retailers in the US. So, if you are sending things to Walmart, you have to use one of their preferred carriers, right? There are situations where um someone hires a non-preferred carrier, they have to stop the shipment midway and have a preferred carrier pick it up. So, old. So, that's another that's another remote source, right? You can't just say, "Hey, I've got a truck. I'm going to deliver things to Walmart." You have to be on the preferred list. So, this is one of the interesting things about these these cyclicals, these industrial companies, which uh they're a lot more dynamic than uh than they may seem at first glance. Uh I was sort of trying to understand the because I I full disclosure I have some ODFL in some of the funds that I manage but I I I'm trying to understand the the cyclicality of this industry a little bit because it's it's uh is it a result of co or is it like a tariff thing or what's the what's driving the this cycle do you think? >> So historically so there's been a couple of different factors at play. tariffs definitely didn't help anything. Uh, ODFL used to be primarily industrial shipments. So, you're thinking like someone shipping a couple lawnmower engines across the country perhaps or uh like a press or something heavy. Um, and so that used to be the majority of their business. Now, I think it's about 6040 industrial retail. So, the the retail business just boomed. And so if consumer if consumer spending softens or if inventories have been replenished at the Walmarts and the Wegman's of the world, um perhaps they don't need as much going through the through the LTL network as they have in the past. So um if you're looking at a per service center uh basis, um the volumes have come down quite considerably over the past couple of years just because u just the the number of shipments has has slowed. Um and that it's a very high fixed cost business. there's a lot of operating leverage and so once you know the the sort of activity in the network slows down that pulls back the margins but the good thing is as the density increases of the network the downside to the margins goes down right and so uh we've seen that with ODFL even though that the the volumes have decreased across the network they are not anywhere close to where they were say you know in the early 2010s uh they've they've they've solidified at a higher rate than they were before >> and you you say that you've seen a an uptick recently. What why do you why do you think there's an uptick and and what do you attribute the uh the uptick? >> Yeah, it's it it's unclear. I mean, I think what's [sighs and gasps] what's happening from what >> there's been a recovery in the stocks or there's been a recovery in the in the fundamentals, >> right? >> Nvidia chips around uh Toby. >> Yeah. I think part of it is there's been some uh addressing of the supply issue. So, some of the the things I've been picking up are that uh there's been a crackdown on um nonlicicensed non-commercial licensed drivers uh to to move things, right? You've seen some stories about um accidents from people who weren't licensed uh to to operate commercial vehicles. Um and I think there's been a more of a crackdown on that side and some of the immigration concerns. Um you know, this isn't a political statement, right? just there's immigration concerns and that uh has has impacted the supply of drivers as well and the that has helped lift rates and so that's helped I I think the based on where the stock prices the recovery that we're seeing uh the market seems now to be looking past those those uh the short-term rate concerns and looking ahead to to a brighter future so to say. So, uh, the stock got pretty cheap, I think, a couple weeks ago, and it's recovered since then a little bit, but I think it's still interesting company to own cuz it's a little bit of a I don't know if it's a a stock market, a saw or a uh or if it's something that somebody's like tested systematically, but there is this idea anyway that transports sort of or one of the highly cyclical uh but very early stage. I tweeted this out yesterday about transports have sort of recovered and look like they're above some moving average or some prior point and so as a result there's some suggestion that that cyclical economy is starting to improve a little bit. >> This is like leading indicator. Is that what you're saying? >> A leading question. Did you say leading the witness objection? >> What what do you think is that are you seeing any sort of recovery outside of transport? Do you think it's or trucking? Do you think it's trucking specific? >> Yeah, I have in the portfolio about 30% industrials right now and I've seen them start to pick up across the board which has been good to see. Um, you know, I also earned Ferg owned Ferguson, which is a a plumbing and water uh infrastructure company. Uh, they've had some nice tailwinds behind a lot of the data center, a lot of large projects being done. So all that bodess well I think for an upturn in the industrial economy here in the next couple of years which would be really nice because it's been a pretty uh difficult place to be over the pre previous uh year to 18 months. >> Yeah, I I tweeted this one out too. I I like to look at the the leading economic indicators against the coincident economic indicators and those two series together. Uh when the leading drops well below the coincident then it's suggesting that there's some weakness. And it's interesting to just take that that ratio of leading to coincident and it goes back sort of 30 years or something like that and you can see there or actually goes back further than that because there's a the there there are three readings that are as low as the current reading and the 1982 at the very bottom 2009 at the very bottom and today are all the same. And there's it's this it's kind of a little >> what does that mean? Well, there's a portion of this uh the leading economic indicators that's sentimentbased and so it's University of Michigan. Some sentiment indicators are in there and they include funnily enough included in those uh leading indicators is the stock market which is strong. So why that is giving a negative reading is basically it's all this sentiment reading is very negative. And I don't know if that's like a if that's a political people generally upset politically or if it's like an actual indication of how they're feeling, but it's it's such a strange reading. It's so far below anything else on that series that it looks to me like we're we're at the bottom of [snorts] a recession rather than at the beginning of a recession. Like if anything, it looks like we're coming out the other side. And then I see stuff like transport's recovering and there are a few other things that look like they're recovering. It's just it's a very strange it's a very strange cycle. I mean, I don't know if that means that macros macro is totally unhelpful. I get that. But I'm I'm I'm interested in it because it has direct impact on some of the cyclicals that I hold. So, I'm I just wonder if anybody folks at home like let me know if cuz I'm I'm sort of interested in it. I haven't really got my head around it completely. The sentiment portion of that leading economic indicator survey, is that misleading or is that telling us that we're at the bottom of an un undisclosed recession depression? Let me know guys >> above my pay grade. >> Yeah, above mine, too. >> Yeah, >> I'd love to figure it out. It's one of those things I've been looking at that, you know, I think in there was it it looks to me like it started in 22 >> and there's just been this like straight line down since 22 to today and it's whacked all of the cyclicals and the only things that haven't been caught in that are things that are beneficiaries of the AI capex spend and GDP is not caught in that because GDP has a big government spending component to it. that just means that it's soaring well above all of those sort of cyclical indicators. It's not helpful at all, I realize, but it's sort of interesting. >> Do you think there's anything in like Mike Green had a recent piece about he was saying like kind of the the the cost of the ticket to be part of the economic game in the US has gotten a lot more expensive than it was in like let's say the 1960s. And a lot of that had to do with housing prices, uh, child care, and medical expenses. >> And the the math that he did came up with something like 130 to 140,000 per year is the equivalent of like the poverty line used to be uh whatever it was back in the 1960s. I've seen some other work since that kind of like cast some doubts on some of those numbers, but uh but still kind of interesting. I have not. >> So maybe is that negative sentiment from like, you know, if you're under that, you feel like you're at the poverty level. >> I read his piece. I thought it was I thought it was very good. I'm not I'm not qualified to comment on any of the numbers that he used or the process that he used, but I didn't >> podcast sir. Go ahead and do whatever. >> But but I'm just like I've been looking at the responses, too. Like it doesn't seem to me that anybody's really addressed his numbers or his process. They've just sort of said that's not how it's done. This is how it's done. But his whole piece was the way that it's done is wrong. Here's another way to think about it. And I haven't seen anybody kind of deal with his numbers. 140 feels heavy to me. That feels high for the poverty line, but >> I think a lot depends on where where you live. 140,000 >> in the Midwest goes a lot further than 140,000 in LA. >> That's a good point. >> So, [snorts] so I I it's sort of like the national housing numbers as well. You hear about national housing. Well, what matters in housing is local. what's happening in the zip code and there are some macro effects there are some larger effects that are interesting but um I think >> you do when you're having these conversations you need to think about what does that mean locally um and I I think I read the piece and I thought you know it was directionally correct and it certainly tapped into a certain feeling or sentiment that a lot of people have and I think that's why it's really taken off is just this kind of tapped into >> this anxiety that I think a lot of people have thinking about AI about you know job security and things and you know just you know am I am I getting dealt a fair hand here. So I think you know in terms of the the the commentary putting numbers behind it I I I just I don't know like you're saying I don't know how to substantiate that whether that's the correct number or not but it definitely tapped into something some sort of spirit that was that's been uh you know hasn't been perhaps discussed enough in society. >> I mean it's certainly turning up in sentiment numbers. It's not I I don't know how they're judging those sentiment numbers. So maybe I should just be quiet about until I figure that out. But it it does seem to me that yeah, there's tapping into something that is being reflected over and over and over again. And I don't know that you can just say everybody you're wrong. Like that I feel like they were saying that >> in relation to the inflation they were just saying yes everybody's wrong. The inflation numbers are are right. And then it >> you know I don't think they are right. >> But it's interesting. I mean, you do look at see some other people post some things in response to it and it's like, hey, look at travel spendings up, uh, hotel spending's up, you know, and so these are highly discretionary numbers and is that really all coming from just the top 10%. Um, maybe it is. I I just don't know, but these are all things that need to be dealt with. Um, and it'd be great to get perspectives from from all areas of the socioeconomic space and not just a bunch of hedge fund managers and wealth managers like oursel, right, talking about [snorts] these things. So, it'd be really nice to to get a more 360 degree view of of these issues because I would I would personally love to hear uh from people, you know, who are going through it uh who are really feeling those those pressures and understand deeper level what's going on. >> I mean, you're right about that. the TS I think the TSA was a record record numbers for throughput in terms of numbers like not in terms of spend in terms of numbers so that would be the a more important measure like spend could be you know tickets are more expensive than they were last year so of course spend is up even though it's the same number of people moving through >> unit volume versus price >> and I think there is a lot of that in businesses that you know numbers are up marginally but unit volume is down a little bit for a few years now >> yeah we're really seeing at the the blowback for that in the consumer package good space. You know, they were pushing price for a number of years and making revenue look great. Uh but the volumes weren't there, which suggests that the re the relevance of the products was declining relative to the value they were creating. You know, I love I love Jake's um uh diagram that he had in his book with cost, price, and value. and you know the the idea that these consumer packaged goods companies are pushing price up closer to the value proposition and so there's no consumer surplus and which is you know impacting their their relevance um and their ability to raise prices in the future. So I yeah I I agree. I think a lot of the growth numbers that we've seen uh from some of these companies have been driven by price more than volume >> or shrinkflation. >> Yeah, sneaky bastards. >> Yeah. >> Uh yeah, CPG. Do you have any CPG companies? You have any insight into what's happening there? >> I think it's just that I think they have not pushed the value out further to make it enough consumer surplus to get people buying their products. I mean, if you think about laundry detergent, you go to Kirkland at Costco, you know, what is the difference between the output from that versus Tide, right? What like why would I pay an extra $2? Is it just the scent? like what what makes it so different that I'm willing to pay. And so, you know, unless the consumer packaged goods companies can push that value proposition further, it it's really hard to to get those volumes back because I think people would like to buy brands, but it's just the value is not clear. And we're all kind of doing these numbers in our head, maybe not explicitly, but we're thinking, you know, why why pay an extra $3 for Tai when I can get Kirkland and it does just as good of a job. >> It came out of the same factory, >> right? And then Proctor GML may have made it. I have no idea if they do it or not, but you know that's that's Costco's game typically is to have the have the CPG or the the OEM so to say uh make make the Kirkland brand for them. >> Yeah. I live in California, so all the detergent that I have doesn't clean the dishes. It just politely asks the grime to leave. [laughter] Doesn't work at all. >> You got that hippie soap. Is that what you're >> The hippie soap? Yeah. Doesn't kill anything. Doesn't clean anything. >> It's incredible. Um what about Copart? Do you want to talk Copart? >> Yeah, Copart's been in a world of hurt. Uh, it's a name that I also own. >> Darling, too for so many years. >> Yeah, great business. >> Yeah, it it is it is a great business and talk about a moat. It definitely has one. Um, a lot of the debate, a lot of the pullback has been on a couple of different factors. One is that IAA, their main competitor, was passed around like a hot potato between owners over the past 20 years. Uh, and so they were not a really effective competitor. So, one of the things that's often brought up is Copart owns their their land where they collect all the the cars for salvage where whereas IAA typically rented their land or leased their land. So, as prices went up, so did their costs. Um, that's one factor. And so, they were they were acquired by Richie Brothers and now they're being integrated into Richie Brother Auctioneers. Um, and so apparently they've been picking up some market share now that they're under this new ownership. So, that's been causing some concerns. Uh but there's also broader concerns that you're seeing on the insurance side of things where Copart talked about how there are more underinsured drivers and uninsured drivers on the road which is a pretty scary thing um to to know that there's like 20% of the people out there driving are either underinsured or uninsured and you know part of the pitch in the history was hey you have to have insurance right you have to be part of this network so if you if your car gets wrecked it goes through the insurance process which is linked to copart But if 20% of the people are, you know, only getting liability coverage and not collision coverage, right? They're not they may not uh their car may not go into that insurance system in the first place. So there's been a couple different factors going in. It was also a little expensive. Anyway, it was trading I think 40 or 50 price earnings at its peak. So So quite high. But today I'm looking at it and it's got $5 billion in cash. And you know the question is what's management going to do with that five billion in cash? Could they do a Dutch tender? Uh could they could they make an acquisition? Where might they fit? So, there's a lot of different uh things going on in the Copart world right now, but I I like the setup. I think um they've got a good management team with a long-term view. They've got these these structural modes where if you are a big large insurance company and you've got a lot of cars to process, you don't have a lot of choice. It's really copart or IAA is is your major way to get the your damaged cars, get returns on them, right? So, one of the things that Copart has going for it is they can take slightly damaged cars in the US. So, let's say you're driving a a new Mercedes and it gets rearended and it kills the sensors in the bumper, right? That may mean that the repair costs in the US are super high and it's not worth the insurance company writing the check. So, they'll put it in their international market for auction and someone say in Eastern Europe might buy it. They don't care about the sensor being broken. they just want to drive a brand new Mercedes. And so it it's it's a way for um Copart to get the insurance companies the best possible price. So it's a it's a talk about a moat that's really difficult to replicate if you were starting with say $10 billion. Really hard to match that business. >> Why why haven't they done a buyback so far if they're like what's the valuation? Where do you where do you put the valuation? >> I think this the stock is cheap right now. I'm I was surprised and a little disappointed that they didn't buy back material amount of stock this past quarter. I thought it was a great opportunity for them to to do that. Um so that's been a puzzling thing to me. Um I I've followed the company for a long time and I think highly of management. So I'm giving them the benefit of the doubt on this one. But it is something that I am concerned about that uh they haven't taken any substantial action. I mean they've got more than half of their assets are cash right now. It's a very cash heavy balance sheet and it's not earning much, you know, put it to work. That's that's how I'm thinking about it. >> Yeah. The uh the founders's biography, the junk into gold, is also quite quite good. That's a fun book. >> Yeah. The founding the founding family um and his son-in-law uh still own it's not a huge amount of stock, but they own a material amount. Um so they're still owners of the stock. Uh maybe I think it's high single digits collectively thereabouts. And I I just [clears throat] realized uh JT we blew through the top of the hour veggies. >> That's okay. >> Sorry team. 9 minutes past the hour. Markin >> served a little cold today. Is that what you're saying? [laughter] [gasps] >> All right. So, uh [clears throat] this is uh there's this place in Edinburgh where the air just feels a little different. It's it's the kind of quiet that you only hear after something really big breaks. And this room that I I was in was the Library of Mistakes. And I was in Scotland last week and uh thankfully uh Russell Napier was kind enough to arrange for the the library to be open for me to come in for a private tour. And uh it's a really fun place to visit if you're a financial, you know, history uh nut like I am. And it's it's wall-to-wall books covering basically every financial disaster that you can imagine. Uh and when you you step inside there like the really the first sensation is is humility uh because just the the quantum of books about disaster is it kind of hits you uh just this aftermath of you know every euphoria from the South Sea bubble 1929 crash LTCM all these really large and almost surreal events that it's kind of hard to believe they were the mistakes were made by people that aren't so different from us. Uh, and so, you know, it's it's kind of funny to me that every other highstakes profession tends to institutionalize its errors. Pilots will study crashes and simulators and improve their checklists. Surgeons meet every week to just dissect the complications. Engineering students will learn from collapsed bridges before they, you know, design a new one. But in finance, we tend to just forget everything. Like it's very comfortable to forget. Forgetting allows us to believe that this time finally maybe we've we've reached some new paradigm. Uh and the library of mistakes is really an antidote to that forgetting. It's a huge part of u of of its power comes from actually where it sits in Edinburgh, a place where there's been incredible historical residents who live there that shape the way the world thinks. So, you know, if you you leave the library, you could walk 10 minutes in almost any direction and you'll find yourself in the intellectual neighborhood of giants really. Uh you we can start with David Hume and I took a picture with his statue when I was there. Uh Hume was a philosopher whose central insight was that humans are creatures of habit and emotion long before they are creatures of reason and he predicted behav behavioral finance basically before any 20th century economist. Um you know short walk away from him lived his friend Adam Smith. Of course people remember the wealth of nations but really Smith's deeper wisdom probably sits in the the theory of moral sentiments uh which is a book about sympathy and pride and narrative and and status. Then there's John Law, also another Scotsman, brilliant, dangerous, uh, invented much of the modern central banking, uh, and also engineered one of history's greatest economic collapses, the Mississippi bubble. Law's life is really kind of a reminder to us that like brilliance and catastrophe are are almost cousins to each other. Um, and if you want to know about how probably how MMT would play out, uh, you know, there's probably already some spoiler alerts there from the Mississippi bubble. [laughter] um not to not to editorialize uh there's some other great Scottish thinkers like James Hutton who was the father of modern geology or JC Maxwell whose equations uh they really unified this these invisible forces that govern in the physical world of electricity light and magnetism. Uh so when you connect all the these ideas the library of mistakes is really quite Scottish. It's it's a shrine to skepticism humility and reasoning. Uh and so for the rest of the veggie segment, I'm going to try to attempt to provide a taxonomy of financial mistakes. Uh breaking it up into four categories. Uh emotional, ethical, structural, and then cognitive. So first up, emotional errors. And we'll start with the obvious, which are bubbles. Uh they begin reasonable enough, usually a new technology, new demographic shift, um a new land opens up, you know, full of fresh resources, and then the story spreads and and then the optimism spreads even faster. and and before long the narrative becomes more powerful than any of the math and tulips, railways, dotcoms, Japanese real estate, like each bubble really swells until buyers end up exhausting themselves and then gravity reasserts. And if if they grow from narratives that these mania uh so if we look at the other part of this like bubbles grow from narratives, mania grow from identity. Uh and there's a little distinction between the two. People buy because other people are buying and they fear missing out more than they fear being wrong. So um from you know Victorian railways to crypto tokens probably to little monster toys and blind boxes that somehow trade for four or five figures today. Uh that's the laboos. Um these mania remind us that crowds are are far from rational agents of of economic textbooks. Next we have ethical errors starting with fraud and they tend to flourish in warm climates. And and I don't just mean Florida. uh [laughter] rising markets uh loose oversight, high trust. Um so you have you know Charles Ponzi, Bernie Maidoff, Ken Lelay, Elizabeth Holmes, Sam Bakeman Freed. Each is a variation kind of on the stream strategy which is promising big growth shrinking evidence that that's actually happening. Inflows replacing verification. It's all good until really the math stops cooperating. Uh and then there's kind of this softer borderland between truth and deception which is found in creative accounting and that usually starts small as well. You know it's shifting a cost here or there smoothing some revenue uh adjusting metrics just this one time and then once becomes policy and then policy becomes culture and rot creeps in. Um you inrod and worldcom are kind of the the headline acts of this but they're there countless smaller examples. Um and then third up are structural errors and this is you know leverage amplifying tiny steady gains into something spectacular until of course these correlations shift by a few degrees and then the whole model snaps. So things like LTCM uh archos or however that's said uh >> no one knows >> what's that yeah I don't know one uh and this is really like cases where stability is actually kind of the red flag. Um and these mistakes they really look harmless until suddenly they're very not harmless. Uh and then lastly are cognitive errors and this is from systems that are tend to be too complex for us to really map. So think of like AAA rated uh you know mortgage back securities in 2008 like it's so complicated CDO squared um maybe like crypto crypto uh tokconomics that kind of collapse under their own opacity. >> Crypto treasury businesses >> crypto treasury businesses maybe. Yeah. Uh, and these aren't really necessarily fail failures of morality, but they're they're failures of comprehension. Uh, the system becomes more complex than the humans managing it can really keep up with. And yeah, I'm probably going to do a future veggie segment on AI funding being maybe the new shadow banking system, but we can put a pin in that for now. But um when you're standing in the library of mistakes, it's you're surrounded by these centuries of like arrogance and ingenuity and collapse and you realize kind of an awkward truth that's enshrined in this brick and mortar and it's it's systems only evolve when they remember and and finance has a memory like a crackhead goldfish really. Uh but the library exists to lengthen that attention span and and one mistake, one story, one slightly less stupid cycle at a time. So, I think it's actually a pretty normal uh noble aim that they're that they have. So, if you can't swing a trip to Edinburgh to check out the library mistakes, uh you might consider taking an online course that they have they offer, which is um it's a practical history of financial markets and maybe even avoiding one mistake there would likely pay for the course many times over. Uh so, that's a little bit of a a dispatch from the road. Uh bringing what uh what I was goofing around with last week into a veggies. >> Good one, JT. Uh, let me do a quick shout out to all the people who were playing at home. Peditikva, Israel. I had instructions on how to say that and I'm sorry I've forgotten. I didn't do a very good job. I know. I apologize. >> Dubai, Philly, Porto Deos, Portugal, Toronto, Sam, you're in there twice. Idaho, Santa Domingo, Valparo, Boisey, Tallahassee, Lan, Switzerland, Oregon City, Oregon, Miami, Bethesda, Toronto twice. You guys should get together. Goththingberg, Sweden, Snomish, Jupiter, Tampa, Breenidge, Breton, Nashville, Suburban, Serbaton, Oslo, Sochi, Russia, Madira Island, Portugal, Dead Cat, Gully, New South Wales. Me too. Rididgewood, New Jersey, Lawrence, Mysore, India. Good spread. There's a couple of good comments in here, too. 60s were a high point in the States. So measuring from the 60s might be giving a misleading answer as to what's today. Quality of living maybe. >> Oh >> I'll gladly take what our modern world over 1960s. I think >> me too. Can't switch from Gillette raises. I think that might be true. I'm kind of coming around to that view. I've tried a few and come back that they are all those extra razors. It really does. It's worth it. Torino, Italy, New York. >> Toby, what are you what are you shaving? Cuz it's not your face. [laughter] Touche. It's my throat. >> Okay. >> Keep it keep it above the above the collar. Todd, uh, let's go back to >> Can I ask a question of Todd? Um, >> Sure. Please. >> Todd, are you able to kind of reconcile, you know, Buffett and I know all the thing, you know, Moes and everything that you've learned over the years and, um, with with ESG, is there a a synthesis that can be done there that that feels satisfying? I think so. Um >> I would love to hear the thoughts on that. >> Yeah, and that's something that we talk about in my class quite a bit. We we we go through all of the sort of the ESG. Here's how to kind of piece through that. And then think about in this second part of class, we we do economic mode analysis and we do stewardship. And so thinking about from a moat perspective, it's it's thinking a lot about um what the risks are to the company. what are the material risks that might break the moat? Right? So thinking about uh is there an environmental risk that the company has or a social risk that has internal or external um relationships. So looking at say a fast food company that has poor labor relations, right? What might that mean when labor gets the upper hand like we saw during COVID, right? Wages had to go up. What does that do to margins? How does that impact the valuation? And so one of the things I've stressed is that you know ESG is not just uh trying to think about you know warm and fuzzy feelings. It's how can we figure out the impacts to the valuation. >> Does it how does this impact cash flows or how does it impact the discount rate? If if we can figure out one of those two things then we can start applying it to to our work. uh what is the what is the risk uh what is the monetary risk that we see uh in different scenarios if if they play out and also think generally thinking about companies that are focused on stakeholder analysis from the beginning so companies that were thinking about how do I um make sure that my employees are are thriving and want to work here um how am I thinking about governance making sure that I'm working for the shareholders and not just working for you know the CEO right um all these things kind of play and kind of come together I think with with an with a Buffett like approach. Um so finding those those stewards who are thinking about these things like if they were if they were talking about sustainability before it became a big hit in 2020 2021 that's usually a sign that they take it pretty seriously. And I've I've found that companies that are serious about it and are hitting their goals and targets are generally doing that elsewhere as well. So, if they're hitting their goals, hitting their targets, putting out measurable targets, they're not saying like, "Hey, we're going to be net zero in 2050, maybe that's the goal, but here's how we're going to get there in the next three years. Here's the steps we're going to take." They're not just making these big promises with no accountability because, as we know, the average CEO tenure is about five or six years, right? So, they can make these long-term promises, but how are they going to how are they going to make the case to that they're getting things done towards that? So companies that can do that I think are um are worth looking at because that means they're probably uh pretty efficient elsewhere in their business. >> So that's kind of like the a reverse cockroach in the kitchen. Um >> right. Right. It's interesting. I I've done a lot of studies a lot of research um into different studies that talk about ESG risk. Uh and one of the things was with governance. So it's not so much first decile top desile governance is like a sign of of outperformance. >> What does that even mean though? I mean like measured to how because you would like you show I've seen Berkshire shows up poorly in some of these things and it's like >> a board independence or something. >> Yeah, exactly. Like somebody's checklist that they came up with. Uh but it's kind of hard to see >> two guys that were more in tune with you know their shareholders and the whole ecosystem than than those two, >> right? It's very difficult to to to normalize everything. Um, but what's interesting about th this research was that didn't really matter if you, you know, checked off all the boxes and you're in top tier or if you're in the sixth tier. It was really avoiding the worst the worst decile. That was where there was a clear signal of of issues with um with performance. >> What do they do? What what do you see in that worst desile? [snorts] >> So, these are boards that are too small. um boards that you know there's no separation of the CEO chairman. Um the there's not a lot of equity ownership uh in that group. Um you know I I had an example from from a previous uh role that I had where I was covering a company that had a huge governance crisis. Um did an acquisition stock fell I think four billion on the day for a $1 billion deal. Uh everybody everybody just had >> everybody's had enough and we're like I'm out. I'm done. you know, I've I've I've kind of gone along with this for for long enough. Um, but yeah, those are the situations that you want to avoid and and what that was one lesson to me was, you know, there were there were even though everything seemed to be looking good business-wise, there was a huge governance red flag and that huge governance red flag should have been taken into bigger consideration because once that comes due, once that bill comes due >> and talking about with the ESG class, we talk about um offbalance sheet liabilities, right? when are those coming due and how much are they going to be and that will have an impact on the valuation. So, you know, really thinking about, you know, avoiding you're trying like Charlie Mer talks about you, right? Avoiding stupid mistakes, right? Avoid the stupid mistakes and good things tend to happen. >> I think that's a good approach. >> Yeah. I always like that saying that the uh I think what was it like the best best internal like defense legal team on is uh is a happy customer, >> right? >> I got a good question from the crowd here. What do you think of the classic flyover industry mattresses? How come everybody missed the emergence of a major compounder there? I actually don't know what that's about. So >> I I I don't either. Um [laughter] I I I would say that um you know what what tends to happen I think with with flyover companies in general is that um maybe they're not as well known on the coasts, right? There's maybe maybe a restaurant like Texas Roadhouse, for example, that just seems a bit kind of bizarre to someone in New York City. Why would anyone want to go to a place that's Texas themed on a Friday night if you're in Ohio? But there's like in my the Texas Roadhouse near my house, there's an additional parking lot for overflow. I mean, so those are situations where I think being uh in the Midwest gives me a different perspective than someone in a major city. Now, there's huge benefits of being in the major cities, don't get me wrong, but I think being in the Midwest gives you a different perspective on some of these um industries that may not appeal or seem obvious to someone in Silicon Valley or New York City. >> What's the story with Texas Roadhouse? Why does everybody love it so much? So, what's interesting about them, and I don't own them, um, but what I know about them is that they have sort of a a decentralized model where the store restaurant manager uh gets a share, I think, of the gross profit. So, the the general managers at the store is, right, they're incentivized to uh they have their own P&L basically. Um, and they get paid as a and I think maybe the maybe the staff does as well. I don't know for sure, but that's one of the things I've seen that's really appealing about the business model. Um, but apparently it's got great food. I haven't been. Um, but I've heard great things about it. Clearly, there's an overflow parking lot. Maybe I should maybe I should go to the one near me. >> Back to us on that. >> I meant purely in terms of the food that they were serving. That's what I was That's what I was interested in. But >> yeah, I think I think it's just like steak, potatoes, that kind of thing. that uh Dutch Brothers had used to have that same uh profit shared arrangement with their operators, but I don't think they do that anymore. Not since they went public or they scaling it back, JT, do you remember? Is it gone or is it just scaled back? >> I don't know. I can't remember. I know at one time it was like that. They were franchise based and very >> That's a hot stock. Where is that now? >> Yeah, it's kind still hot. >> It's not not as hot. as >> I mean the returns on capital of that were always just insane. Like you throw a little trailer up in a parking lot and then like just shove caffeine through it and uh >> there's unlimited demand for caffeine. >> Caffeine and sugar and fat all at the same time. What a genius model. >> Yeah. And Jake, I was going to ask you um I know we're running short on time, but um with the with the mistakes of museum, that's kind of interesting. Um, you know, it's one thing I've really wrestled with myself is trying to figure out the balance between the proper amount of arrogance and humility >> in in investing is, you know, you talk about, you know, some people say, hey, you got to be arrogant, other people say you shouldn't be arrogant, you know, trying to find, you know, that that line. And the best thing I found is um from the book Super Forecasters, you know, Tetlock talks about intellectual humility, right? It's it's not the same as self-doubt. It's, you know, taking into consideration like base rates and things where um, you know, maybe I'm not making some exceptional bet here. I have to think about uh what the average company in this reference class has done. Uh, but that's even then um it can be difficult to to outperform when you don't have that certain, you know, bravado that gives you a chance so to say to outperform, but also gives you the chance to crash and burn as well. Yeah, there's an amazingly fine line between high conviction and arrogance um or even um you know discipline and stubbornness, >> right? >> And I I mean it's just did this did it work out is probably the only answer of you know which one was it, >> right? Uh but yeah, I mean I do think you can definitely do some things to kind of keep yourself intellectually honest along the way like you said like understanding the base rates probably like doing probabilistic predictions for yourself and then seeing like >> if ideally going back and like understanding your brier score like how is your confidence versus your competence >> um it's very rare to see >> it's been a great way to underperform for about a decade >> right >> yeah do all this work and then uh don't buy Nvidia and then just get get smoked by everybody and their and their mom. But uh >> I just like approaches that I just like statistical approaches for the just clear out the things that are have earnings manipulation or any sort of suggestion of earnings manipulation or any sort of >> apparently bad governance also >> broad any kind of I just and it's I I put them all I lump them all together because I think where you get one you get the others. Nobody's nobody's doing all of that any of that stuff when they're doing really well. And it always clears out a few things that I it never it's never anything I don't find it clears out anything that I would be buying anyway. But it's there's always it always makes me laugh at some of the names that pop up because they're often, you know, popular names in the retail on Twitter. They're names that a lot of people hold >> and they're those those scores are terrible. Yeah. >> Speaking of that, I saw an update on Rick's. I don't know. Did you guys see this? The >> what? They bought back. They bought back that shareholder stock. That's crazy. >> Yeah. Right before the uh >> the ADW stock >> CEO and the CFO >> apparently step down but are keeping uh their same salaries and same vesting schedule >> from jail. >> Well, who knows? But yeah, it seems like quite the governance uh mess at this point. Who would have thought that industry would have attracted uh somebody with maybe different scruples, >> right? We we just we joke. Uh that's that's time. Todd, if uh folks want to follow along [snorts] with what you're doing or uh get in touch with you, what's the best way to do that? >> Sure. Uh my RAIA's website is kn-- capital.com and my substack is flyoverstocks.com. >> JT, any final words? >> Good question. >> No, not right now. >> If you're interested in tracking that stuff, uh Journalytic is a great tool for doing that. Keep keep you honest, keep you intellectually humble. >> Absolutely. I agree with that. >> Uh thanks folks. We'll be back next week.