A Conversation with Todd Wenning

This month, we caught up with Todd Wenning, a seasoned investor and accomplished writer from Cincinnati, Ohio. Since 2006, Todd has been actively sharing his insights in his weekly Blog, Flyover Stocks into investing on various platforms. One blog article, 15 Questions to Ask Managment Teams, Revisited caught our eye. What he had to say might surprise you.

Can you provide some background information on how you got to these 15 questions and why you feel they are so important when valuing a company?

Drawing from experience and conversations with management and IR teams, I've developed these questions over my 12 years on both the sell side and buy side. What I've tried to do, because I take a long-term perspective and want to take an ownership position in the business, is really understand who I'm partnering with and what truly matters to the business. I'm not so worried about the quarter; I'm more into grasping what makes the company tick. Because when times get tough, you want to know what you're invested in, right? It's not about being anxious over what the quarter might bring; it's about understanding how management might respond to changes. So, my questions are really about that—trying to understand not just the managers themselves on a general or personal level but also what drives the business at a deeper level, what gets the company moving on a day-to-day basis.

Warren Buffett has this great quote about how companies' moats expand or shrink every single day, but you can't see that from the outside, not until it's been a few quarters or years, and it's already manifested itself. So, understanding what generally happens on a day-to-day basis at a company, and what makes management tick, that's what gives me a bit more confidence as a long-term investor.

Have you noticed any correlation between a management team’s character (for instance: openness, humor, agreeableness, humility) and a company’s overall performance?

Yeah, I've seen some positive correlations between the responses I get and the company's performance later on. But, there can be a disconnect sometimes between what's being said and what's actually executed. Part of my job is to figure out what's being told to me versus what's really happening at the ground level. But it's crucial for me to gauge the authenticity of what's being said.

There've been instances, a few anecdotes, where management teams have given me really good answers, and those were the “aha” moments, you know? For example, this team understands what's needed, and it's time to back them financially. Sure, I have those examples. But then there are times when I felt I was on the right track with management, trying to understand the business, and somewhere along the line, things just didn't connect, and the stock didn't perform as expected. So, it's not just about asking questions and getting answers; it's also my role as an analyst to triangulate and really understand what's happening on the ground.

When you ask about what steps a company has taken to widen its moat, have you stumbled upon any innovative or unexpected strategies that particularly impressed you?

Well, it's really impressive when a company truly gets what its moat is, and importantly, what it isn't. You know, "economic moat" is a term that gets used a lot, almost turning into a commodity. What's crucial is that management sees the moat the way I do, trying to understand their real, sustainable competitive advantages. What's their unique edge that competitors can't just replicate? Even if they tried, it might take them five to ten years, and I'm okay with that. Because that's what a moat does—it gives management time. They're not always reacting on the fly; they can take their time to build and implement a strategy instead of having to respond to everything that comes their way. That's the true benefit of a moat.

So, when I ask this question, I'm trying to first figure out if management understands what their moat is and then, what actions they can take to broaden it over time. If a company has a low-cost advantage, I want to know how they plan to maintain that edge. I've been following one company, a UK-based insurance company, very focused on keeping costs down. When they expanded to the US, they introduced this culture of cost-consciousness in interesting ways. For instance, if someone printed something unnecessary, they'd have to do push-ups in front of the CEO's desk. It was about making everyone aware of each cost, even as small as a piece of paper. These kinds of stories about company culture and its link to the moat are what I'm digging for when I'm questioning management.

Have you ever run into a company that could not identify its moat?

Sometimes I find that if the management isn't clear on what its advantages are, there probably isn't a moat, or it's not something they've thought about clearly enough. I might ask a question or two, and they'll respond, "Oh, that's what you're talking about." But really, I'm trying to get at things that might not be obvious to me from the outside. Typically, when I approach a management team, I've already done my homework on their financial history, and I'm usually attracted to companies that have had high returns on invested capital. They're doing something right, and my job is to figure out if it's cyclical or secular, and sustainable by nature.

So, I try to ask, "Why have you been able to surpass your cost of capital? What are you doing that your competitors aren't?" I want to understand what separates them and what allows them to keep producing these high returns. If that's not clear to them, that's not good. Sometimes it's something structural, where I'll ask about a certain product, and they'll say, "Our competitors just can't compete, and here's why," or "Our customers keep coming back to us, and we win contract renewals 99% of the time." That's great, but why? That's what I'm trying to figure out, trying to understand what at the core gives this company a durable competitive advantage.

Aside from direct engagement with management, what other resources or methods do you recommend for evaluating a company’s management team/overall business strategy?

Nowadays, investors have way more resources to dig up information about a company—through expert interviews, industry people, business journals, and various other methods that help you triangulate and verify what you're trying to learn about management. Any seasoned investor gets that management teams are usually skilled in interacting with investors, delivering their messages effectively. They generally didn't climb to the top without being good at marketing themselves and their vision. So, as investors, we've got to be really conscious of that. It's not to say they're not genuine, but we've got to keep our eyes open.

My job, then, is to seek out other sources to confirm what I've been told. Sometimes, I'll chat with someone from the industry, and they'll say, "That hasn't been my experience." That's when it turns into another talk with management, or I dive deeper into my research on the company, trying to figure out what's actually happening on the ground.

Do you have any good book recommendations that management teams/CEOs need to read to better engage with investors?

I'd recommend two books for management teams and IR teams. The first is The Outsiders, which discusses eight unconventional CEOs and their approach to capital allocation, written by William Thorndike. The other is Lessons from the Titans, authored by three analysts. It's about their experiences with industrial companies, drawing parallels between today's big tech firms and the big industrial companies of over 50 years ago, which were the big growth companies of that era. The book offers a blueprint for how big tech should operate today, especially when growth slows, emphasizing efficiency. It highlights how successful industrial companies had a clear strategy and underscores the importance of stewardship, particularly pointing out Dave Cote at Honeywell, who expressed a long-term interest in the company's stock value, emphasizing the importance of long-term stewardship.

From an investor's standpoint, especially those of us focused on the long term, we're somewhat skeptical about management's commitment to staying the course. The average stay is around four or five years in a public company role, which isn't enough to fully realize a strategy, right? So, it's key for us investors to feel confident that management is in for the long haul, aiming to enhance value for the business even post-departure. Even if a CEO from a smaller firm climbs the ladder and leaves the firm, we want to see them establish a virtuous cycle at the business, ensuring smooth sailing even after they've moved on, as opposed to them just maximizing their earnings and then leaving the rest for the next person. We're not looking for that. We're all about the long term.