Illustration: Angus Greig
By Katie Benner
September 19, 2013

Is it possible that U.S. auto stocks are hot? Only five years ago the industry was left for dead amid the Great Recession. General Motors and Chrysler filed for bankruptcy. Ford mortgaged its logo and undertook a difficult overhaul. Annual U.S. car sales plunged to 10.4 million units in 2009, a number not seen since World War II.

Now profits have returned to Detroit. The market is on the road to 16 million in sales this year thanks to the domestic economic recovery and pent-up demand to replace aging cars and pickup trucks. Even Europe’s long-suffering market is showing signs it might shake off its torpor. Little surprise, then, that GM’s shares have accelerated, rising 57% over the past year, while Ford’s zipped up 76% (to say nothing of electric-vehicle newbie Tesla, whose shares rocketed 478%).

The U.S. rally seems to have a few laps to go. Rates on auto loans are forecast to remain low. Consumers’ appetite for high-margin pickups, a category dominated by GM and Ford, is outpacing that of cars. And dramatic improvements in technology — including fuel economy, cameras, crash-avoidance mechanics, and Internet connectivity — should encourage buyers to trade up just as smartphones sparked a wave of mobile-phone upgrades, says Citigroup’s Itay Michaeli. Ford and GM have been leaders in that trend.

GM shares offer the most opportunity for investors looking at the big automakers (we’re putting aside Tesla, whose prospects remain too speculative for our tastes). GM’s debts were largely cleansed in bankruptcy court. And even after its rise, the stock is still trading at a sober price/earnings ratio of 8 times forward earnings, vs. 15.8 for the S&P 500 and 10 for Ford.

The government’s exit from GM should help too. The Treasury Department has sold about 140 million shares this year (roughly one-sixth of the float). That has weighed on the stock. But analysts say the sales could end in a few months as the government closes out its position. At that point, “restrictions on compensation and recruiting will lift, and the company can have the flexibility to go after talent,” says Sterne Agee analyst Michael Ward, who adds that a dividend may be in the stock’s future.

GM is saving money by using a limited number of platforms, meaning that more cars share chassis and are more efficient to build. In 2010 only 39% of GM vehicles were assembled using shared platforms, according to Morningstar’s David Whiston. That number climbed to 71% this year and could reach 96% by 2018.

The company’s timing has been good too: GM has been introducing promising cars (its new Impala is drawing strong reviews, and the Cadillac ATS is leading a resurgence of the formerly tired brand) just as demand is picking up. The bankruptcy and recession were calamitous. But in this case, what didn’t kill GM appears to have made it stronger.

This story is from the October 07, 2013 issue of Fortune.

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