CEMATRIX Corporation (TSX:CEMX)

Lumpy Past, High-Visibility Rebound

A Note About Price Targets

If the one-pager provides a concise overview of the most important elements of a thesis, scenarios offer a snapshot. To allocate capital effectively, it is critical to first make explicit forecasts of price targets and probabilities, and then properly account for the asymmetry between upside and downside.

Price targets should be viewed as a distribution of potential outcomes, each with an associated probability. The combination of these outcomes produces the probability-adjusted price target. Every piece of information gathered through the research process can be incorporated into this probability-weighted analysis, and each new input will shift it.

In short, probability-weighted returns synthesize your research, reflecting the ultimate culmination of the research process, the shared language of investment discussions, and the anchor for subsequent decision-making. Furthermore, it instills discipline by treating each position as if it were brand new every day, considering the full breadth of fundamental research and eliminating performance-draining oversight.

Finally, geometric returns place greater emphasis on downside risk, reducing the probability-weighted returns for assets with a high likelihood of extreme loss, a practical adjustment for a compounding vehicle like a portfolio. In summary, the most theoretically sound price target is a time-adjusted, geometrically weighted, probability-weighted value.

P.S. On this part of the investment process, all credit goes to Alpha Theory, the GOATs of position sizing for fundamental managers.

Initiating coverage of CEMATRIX Corporation (CEMX.TO): Buy rating, C$0.82 target price.

CEMX is a company that doesn’t screen well on LTM fundamentals, and most investors dismiss it as excessively lumpy. Zooming out, however, the flywheel effect of product validation from prior project successes becomes apparent, despite a capital-intensive business model transition that resulted in a multi-year, relatively range-bound performance.

Now, the setup is different. The company has a new CEO, its balance sheet has improved, and shares were reduced for the first time in its history. The seasonally low 2024 is setting the stage for record highs in FY25 and FY26. With profitable operations and a net cash position, there is not only no need for further dilution, but an accretive acquisition is also on the horizon.

The CEO phrased it perfectly: “In fact, the other day I went looking for a company with a market cap under C$50M, revenue over C$50M, with positive cash flow, and positive adj. EBITDA. I could only find one in Canada.” While the company may have now surpassed this C$50M threshold, the analogy still holds true.