Here’s Why Headwaters Capital Management Added CBIZ (CBZ) to its Portfolio

Soumya Eswaran

Thu, Apr 10, 2025, 9:02 AM 3 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 CBIZ, Inc. (NYSE:CBZ). CBIZ, Inc. (NYSE:CBZ) offers financial, insurance, and advisory services. The one-month return of CBIZ, Inc. (NYSE:CBZ) was 11.19%, and its shares gained 2.41% of their value over the last 52 weeks. On April 9, 2025, CBIZ, Inc. (NYSE:CBZ) stock closed at $76.12 per share with a market capitalization of $4.115 billion.

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

"During the quarter, two new positions were added. The fist new company added was CBIZ, Inc. (NYSE:CBZ), a provider of accounting, tax and advisory services to small and midsize businesses. The addition of CBIZ was funded with proceeds from the partial sale of BRO, which had grown to be the largest position in the portfolio. When looking at CBZ, I see a lot of similarities to BRO 4 years ago. Similar to BRO’s P&C brokerage services, accounting and tax services are essential and required in any economic environment. High customer retention, ongoing new business wins and moderate pricing increases provide visibility into future revenue growth. CBZ also generates strong free cash flow, which will be utilized for M&A that can contribute more materially to results than for BRO. Valuation was also attractive with the stock trading down to a level not seen since July of 2019. CBZ’s multiple compression was driven by a soft earnings report at the end of February when the company forecast lower revenue than expected from Marcum, its most recent acquisition. The sell-off was exacerbated by broader equity market weakness the following week, creating a temporary dislocation that HCM capitalized on. Speaking with management after the earnings call, I gained comfort in the outlook for the acquired Marcum business and increased conviction that the expense synergies associated with the deal are likely to exceed street expectations. Assuming the stock recovers back to its 14x EBITDA multiple, my price target of $114 on 2027 estimates represents +72% upside from our purchase price, or a +22% IRR. For a business that shares many of the same characteristics as BRO (CBZ even has a small P&C brokerage business), this significant upside warranted a re-allocation of funds."