Contrarian Value Investing in the Age of AI: The Case for Long-Term Fundamentals

The global financial landscape in 2025 is increasingly shaped by artificial intelligence, quantitative models, and momentum-driven strategies that prioritize speed over substance. In this environment, contrarian value investing-rooted in the assessment of long-term fundamentals-faces a formidable challenge. Yet, as Laughing Water Capital's Q3 and Q4 2025 commentaries demonstrate, the discipline of identifying undervalued, off-the-beaten-path businesses with durable competitive advantages remains a compelling, if underappreciated, approach to generating alpha over multi-year horizons.

The AI-Driven Momentum Trap

The dominance of AI and factor-based strategies has amplified market myopia, with algorithms prioritizing short-term earnings surprises and liquidity over the structural strengths of businesses. According to the Q3 2025 commentary, Laughing Water Capital's portfolio underperformed the S&P 500 Total Return (SP500TR) and Russell 2000 indices by significant margins, with a -1% quarterly return and -2.7% year-to-date (YTD) performance, compared to 12.4% and 8.1% for the SP500TR and R2000, respectively. This underperformance, the firm argues, is not a reflection of flawed fundamentals but rather a symptom of a market that has "lost sight of the long-term".

Quantitative models and AI-driven investing, while efficient in processing vast datasets, often overlook the intangible but critical elements of business value-such as management quality, operational resilience, and industry positioning. For instance, Lifecore Biomedical, a key holding in Laughing Water's portfolio, reported Q2 2025 revenue of $35.2 million, a marginal decline from $35.7 million in the same period in 2024. However, the firm's role as a contract development and manufacturing organization (CDMO) in the biopharmaceutical supply chain-critical for drug innovation and production-suggests long-term growth potential that current valuations fail to capture.

The Contrarian Edge: Patience and Asymmetric Risk/Reward

Laughing Water Capital's strategy hinges on the conviction that markets will eventually recognize the intrinsic value of such businesses. The firm's Q4 2025 commentary reaffirmed its focus on "logic over momentum", emphasizing that key developments-such as management-led value unlocking or capacity expansion-may not immediately boost earnings but are foundational to long-term success. This approach requires patience, as the market's fixation on quarterly results and algorithmic trading cycles creates dislocations that favor those with conviction.

The firm's concentrated portfolio, with the top three positions accounting for 82% of assets, exemplifies this philosophy. While concentration inherently increases volatility, it also creates asymmetric risk/reward opportunities. For example, Lifecore Biomedical's expertise in complex biologics manufacturing positions it to benefit from industry tailwinds, such as the rising demand for personalized medicine and the need for resilient supply chains. Yet, as of Q4 2025, the market has yet to price in these long-term dynamics.

Navigating the Short-Termism Dilemma

The tension between short-term momentum and long-term fundamentals is not new, but AI has accelerated its impact. Data from Q3 2025 indicates that large-cap growth stocks, buoyed by algorithmic buying and speculative fervor, have outperformed despite mixed earnings. This creates a paradox: while the S&P 500's gains are partly driven by a handful of dominant tech stocks, smaller, fundamentals-driven businesses like Lifecore remain undervalued.

Contrarian value investors must navigate this paradox by focusing on three pillars:
1. Deep Research: Identifying businesses with durable moats, such as Lifecore's specialized manufacturing capabilities.
2. Time Horizon: Accepting short-term underperformance in favor of long-term value creation.
3. Concentration: Allocating capital to deeply researched opportunities where the margin of safety is highest.

Laughing Water's Q4 commentary underscores that this strategy is not for the impatient. The firm acknowledges that its approach will continue to lag in environments dominated by momentum but remains confident that "dislocations will resolve in favor of those with conviction and patience".

Conclusion: The Long-Term Horizon

In an AI-driven market where short-termism reigns, contrarian value investing offers a counterbalance. By prioritizing long-term fundamentals over algorithmic noise, investors can capitalize on mispricings that emerge when markets overreact to near-term volatility. Laughing Water Capital's experience with Lifecore Biomedical and its broader portfolio strategy illustrates that while the path is bumpy, the rewards for patient, disciplined capital are substantial.

As the firm's Q4 2025 letter concludes, the key lies in "staying the course" as the market's focus on momentum gives way to a reevaluation of enduring business strengths. For investors willing to embrace this philosophy, the next 3–5 years may yet prove to be a period of significant outperformance.