(FORTUNE Magazine) – Food stocks are back. Until recently packaged-food companies seemed pretty unappetizing to investors, even though they have been serving up earnings increases of 15% to 25%. Those growth rates, handsome as they are, have looked puny compared with the muscular figures posted by steelmakers, chemical firms, and other heavy industries. As a result of such comparisons, food stocks lagged well behind the market during the first half of 1988. But the trend began to change in mid-July, and since then the food group has actually outperformed the Standard & Poor's 400 industrials. Now many security analysts believe the food sector is worth a nibble. Says William Maguire, an analyst at Merrill Lynch: ''You want to pick out two or three of your favorite issues before the prices go too much higher.''

Why the upsurge in demand? Worried about inflation heating up, interest rates rising, and a volatile dollar, investors are moving into the sort of equities that thrive even when times turn tough. ''People are getting a little defensive,'' says Lawrence Adelman of Dean Witter Reynolds. ''With the Fed tightening up, some sectors of the economy could begin to weaken.'' If the economy does slow, food companies will be among the last to feel the pain. Consumers can put off buying a car or a house or a personal computer, but they don't defer their next meal, at least not for very long. So food stocks have a record of good performance in bad markets. But what about the impact of this summer's crop-crippling drought? Higher corn, wheat, and soybean prices will squeeze food company profits much less than you might expect. Commodities account for under 15% of the retail price of crackers or breakfast cereal; packaging, marketing, and factory overhead costs are the most expensive ingredients. Besides, food companies are extraordinarily successful at getting the customer to foot the bill when costs do increase. Analysts are especially partial to food companies that have restructured. Many firms are selling off the businesses they gobbled up during the diversification binges of the past decade. Kraft, for one, has spun off most of its other lines into a new firm, Premark International. In June, Kraft sold Duracell, its only remaining nonfood business, to an investment group led by Kohlberg Kravis Roberts for $1.8 billion. Kraft, whose larder includes such strong brand names as Velveeta and Miracle Whip, will use some of the proceeds to repurchase as many as 12 million of its own shares -- a value-boosting exercise that is becoming increasingly popular among food companies. ''Kraft has cleaned up its portfolio, and it's sitting on a lot of cash,'' says Roger Spencer, a food analyst at Paine Webber in Chicago. He expects the company's earnings per share to jump by 34% this year, to $4.30. Kraft has a yield of 3.7%, one of the richest in foods. Another company that is getting back to basics is Gerber Products, which dominates the baby-food business with a 72% market share. David Johnson, the former boss of Entenmann's who became Gerber's chief executive last September, plans to sell off Gerber's money-losing furniture division, which should help the company recover from the lackluster earnings performance of the past two years. Gerber's stock price has soared 40% since the beginning of the year, making it the food group's star performer, but security analysts still see plenty of room left for growth. Maguire of Merrill Lynch predicts that Gerber's earnings per share will leap 35%, to $3.60, next year. He also sees the company as a potential takeover target. ONE RESTRUCTURING PLAY that hasn't received much attention is McCormick, the Maryland-based spice producer. After it restructured and perked up its retail spice line, it has begun to recover from a three-year-long slump. McCormick, whose stock trades over the counter, recently announced plans to sell off a real estate unit. Barry Ziegler, an analyst at Tucker Anthony in New York, expects that sale to net $190 million, giving McCormick a fund to spend on acquisitions and stock repurchases. ''I think this is a classic turnaround situation,'' he says. He forecasts earnings per share of $2 in fiscal 1989, an increase of 31%. Not all analysts like McCormick, but almost nobody, if you'll pardon the expression, doesn't like Sara Lee. The Chicago food company recently announced record earnings of $325.1 million for the fiscal year ended in July, its 11th consecutive annual increase. Earnings per share grew by 20.4%, to $2.83, and Nomi Ghez of Goldman Sachs expects another 17% jump next year. Roughly half Sara Lee's earnings still come from nonfood businesses, but those businesses, such as Hanes underwear, are the sort that do well in a slowing economy. ''If we enter a recession,'' says Ghez, ''I can predict people trading down from Victoria's Secret to plain white underwear.'' Changes in consumer tastes have already bolstered General Mills. Health- conscious Americans, determined to consume more fiber, are going for breakfast cereal. Minneapolis-based General Mills reported earnings per share of $3.05 for the fiscal year ended in May, an increase of 30%. Return on equity topped 40%. Dean Witter's Adelman expects earnings per share to increase 18% next year. That kind of growth rate, taken for granted this overheated summer, could make investors stand up and cheer by next spring.

CHART: NOT AVAILABLE CREDIT: NO CREDIT CAPTION: A WARMING TREND Once laggards, food stocks have been outpacing the market. Investors worried about a slowing economy are buying steady earners like Sara Lee, whose bakery in Deerfield, Illinois, makes blueberry muffins. DESCRIPTION: Revenues, net income, stock price range, recent price for packaged-food companies Kraft, Sara Lee, General Mills, McCormick and Gerber Products.