Headwaters Capital Management’s Top Q1 Contributor: Brown and Brown (BRO)

Soumya Eswaran

Thu, Apr 10, 2025, 8:59 AM 4 min read

Headwaters Capital Management, an investment management company, released its first-quarter 2025 investor letter. A copy of the letter can be downloaded here. Smaller businesses, which are thought to be more susceptible to economic downturns, faced a challenging combination of economic and policy uncertainties in the quarter. It was not unexpected that small-cap equities led the market lower given the economic conditions that prevailed in Q1. In this environment, the fund returned -9.0% (-9.2% net) in the quarter compared to a -3.4% return for the Russell Mid Cap Index. In addition, you can check the fund’s top 5 holdings to determine its best picks for 2025.

In its first quarter 2025 investor letter, Headwaters Capital Management emphasized stocks such as Brown & Brown, Inc. (NYSE:BRO). Headquartered in Daytona Beach, Florida, Brown & Brown, Inc. (NYSE:BRO) provides insurance products and services. The one-month return of Brown & Brown, Inc. (NYSE:BRO) was -1.04%, and its shares gained 41.13% of their value over the last 52 weeks. On April 9, 2025, Brown & Brown, Inc. (NYSE:BRO) stock closed at $116.64 per share with a market capitalization of $33.432 billion.

Headwaters Capital Management stated the following regarding Brown & Brown, Inc. (NYSE:BRO) in its Q1 2025 investor letter:

"Top Contributor: Brown & Brown, Inc. (NYSE:BRO) +22%. BRO was a stand-out performer during the quarter and is a perfect example of the market rotation that occurred in Q1. Fundamental results remained strong, but were largely in line with expectations. However, the stock was a beneficiary of multiple expansion as investors viewed BRO’s P&C brokerage business as a safe haven in a tumultuous market. BRO’s multiple expanded from 18x EBITDA at the beginning of the quarter to 21x by the end of the quarter. While I continue to expect BRO to post strong results from a combination of pricing, volume and M&A, the stock is trading at a peak multiple on what is likely near peak P&C rates given the prolonged strong pricing environment over the last 4 years. Given the significant outperformance during the quarter and elevated valuation, I significantly reduced the position size as I saw better opportunities in other parts of the market.