Today’s market conditions are challenging for many companies. Inflation is eating into bottom lines, interest rates are rising and consumers are cutting back. Steady compounders — stocks that have produced consistent, growing returns for investors — are always key pieces of a diversified portfolio, and they are especially important during times like these.

Consumer staples are a good place to search for consistent growth. Within that sector, I’m finding opportunities among food and beverage stocks. Many of these companies have defensive qualities. They can weather inflation well because their products are always needed. In the past couple of years, they’ve had a golden opportunity to reintroduce themselves to consumers. Before the pandemic, many companies spent years revamping their offerings to make them healthier and better tasting. The new formulations demonstrated to customers that it was possible to eat well and inexpensively at home.

I think the combination of resilience in a high-inflation, high-uncertainty economic environment and newfound consumer appreciation could power some of these companies to attractive returns thanks to the combination of earnings growth, dividends and buybacks.

Make no mistake: These enterprises aren’t highfliers. They won’t quadruple in a few years the way some technology stocks did in the past decade. And certain parts of the industry, such as high-end spirits, aren’t benefiting from consumers’ budget-conscious approach. But I think many of these companies are well positioned for consistent year-over-year growth.

Food and beverage store monthly sales in the U.S. from 2017 to 2021

Source: Statista. As of May 2022.

Cost-conscious consumers have rediscovered eating at home.

Though many businesses struggle with inflation, food and beverage makers are much less impacted. That’s partly because it’s a lot less expensive to cook at home than to go out. With restaurants now charging $20 or more for a plate of pasta, it’s an easy decision to whip up something in your kitchen for a fraction of the cost.

That decision has been made even easier given the upheaval caused by COVID-19. Pandemic lockdowns came after the industry shifted its focus from chasing efficiencies and widening margins to meeting consumer tastes for healthy and tasty options. Shoppers found a rich variety of intriguing and health-conscious products, such as expanded lines of Greek yogurt and other once-niche offerings, alongside updated versions of old favorites. It was a perfect reintroduction to some American staples that had fallen out of favor, such as breakfast cereals. Consumers discovered they could quickly make simple and satisfying meals — and when they read the labels, they saw that these products weren’t bad for their health.

The shift back to the home kitchen seems to have some durability. In 2019, consumers ate out more often and restaurant volumes were growing. Lockdowns reversed that. Many consumers, especially millennials, learned that it’s not hard to cook for themselves, and it’s a lot cheaper. That change in behavior seems to have stuck as restaurant volumes haven’t returned to pre-pandemic levels.

Some companies will ride these tailwinds better than their competitors.

While food and beverage companies are enjoying several tailwinds right now, they’re still differentiated in subtle but important ways. For example, some categories, such as coffee and pet food, are growing faster than others. I’m carefully watching these trends and paying close attention to companies that have well-managed portfolios of brands focused on such areas.

Some companies have become more promising by dint of the highly positive backdrop. I’m watching a handful of businesses with high debt levels but also high dividends — a combination I’d be more likely to pass on in a typical environment. However, the tailwinds are pointing in the right direction today, and some of these companies could find themselves in a position to generate enough cash to pay down their obligations while maintaining their yields — a promising scenario for investors.

Similarly, some management styles tend to better reward investors than others. I always watch for disciplined capital management. Companies that reinvest smartly and earmark excess cash for dividends and stock buybacks demonstrate consideration for shareholders. Some teams have shown remarkable capability to persevere through unexpected events, including Russia’s invasion of Ukraine. One company continued growing its earnings despite losing access to regions that produced nearly a tenth of its profits — an incredible level of management.

Conversely, some areas are showing strain. “Super-premium” items seem more susceptible to consumer belt-tightening. For example, I’m cautious about spirits. During lockdowns, when vacations and travel were constrained, consumers felt a little freer to splurge on an expensive bottle of vodka or gin. However, just as they did with restaurants, consumers are showing an inclination to trade down in this category. Ironically, spirits are especially susceptible to consumers’ willingness to make their own meals and drinks: It’s hard to taste the difference between a $10 bottle and a $50 bottle when they’re in a cocktail.

Overall, it’s a great time to be investing in this sector. I believe there’s a lot of room for solid, steady growth that can benefit investors in a choppy market.