It may not be happy days again for the auto industry and its shareholders, but there is light at the end of the highway.

High fuel prices have boosted sales of smaller cars, while luxury brands have been energized by improving economies and strong Chinese demand.

Parts shortages limiting the availability of Japanese vehicles are proving beneficial to domestic brands. Financial incentives offered by U.S. carmakers to buyers have been reduced to their lowest levels in six years, according to Edmunds.com.

"I have a positive outlook for the auto industry because I believe we are in the early innings of a multi-year rebound in demand in the U.S. and globally," said Efraim Levy, auto analyst with Standard & Poor's Corp. in New York. "That positive sales increase should benefit most of the participants in the industry."

First-quarter earnings of General Motors Corp. and BMW AG tripled their results of a year earlier and profits of Mercedes-Benz manufacturer Daimler AG nearly doubled. Volkswagen AG and Ford Motors Co. results were also robust.

In past years, Japanese carmakers were the beneficiaries of any move to smaller cars, but it is no longer such a clean sweep. Domestic carmakers offer an increasing number of smaller vehicles and should benefit as well.

"But there's really no one big winner or loser in this changing mix of vehicles," Levy cautioned. "Ford or GM can offer substitutes for pickup trucks, but profit margins are still smaller on the smaller vehicles."

New vehicle sales in the U.S. were up 18 percent in April, according to the Autodata Corp. research firm. GM, Hyundai, Ford and Chrysler Group LLP enjoyed significant sales increases, while Toyota, Honda and Nissan were not as strong. Toyota said it doesn't expect to resume a normal production schedule until November.

"Summer is going to be the most difficult time for the auto industry because fuel is its number-one problem," said David Silver, auto analyst for Wall Street Strategies in New York. "If fuel prices continue to increase we'll see auto sales really cut back, but if we see a steep decline in prices -- which isn't out of the realm of possibility -- there will be a surge in sales of all types of vehicles."

If fuel prices simply remain right where they are now, motorists will adjust and sales will "be OK" through the end of this year, he expects.

"GM has been improving fundamentally, but it will be difficult to compete with Ford, Toyota, Nissan and Honda moving forward, especially with $4 gas," said Silver. "It has the Chevrolet Silverado and a strong presence in trucks and SUVs, but in smaller, fuel-efficient vehicles, the Chevrolet Cruze must prove itself, and GM is also in competition with the Toyota Corolla and Ford Focus and Fiesta."

Analysts can see why auto stocks haven't performed better despite their improved financial results.

"2010 had been a fantastic year for automakers and that meant some profit-taking; the fourth-quarter results disappointed; and the Chinese government has taken steps to slow automotive sales growth," explained Kirk Ludtke, auto analyst with CRT Capital Group in Stamford, Conn. "At the same time, commodity costs have risen and some companies that had cut costs dramatically are now seeing structural costs creep back into their businesses again."

He is optimistic about the potential for long-term future auto industry growth. The most mature sales markets are closer to the bottom than the top in terms of volume, which allows plenty of upside, Ludtke believes. Meanwhile, the emerging markets, especially China, present tremendous opportunities yet to be tapped.

"The three Detroit carmakers are no longer forced to make products and then dramatically discount them," he said. "There is a lot more pricing discipline now than there has been in many years."

Investing in the stocks of carmakers is never a sure thing and always subject to industry cyclicality and factors such as energy costs. The move toward more fuel-efficient gasoline vehicles and electric vehicles can't happen fast enough.

Among the most popularly traded auto stocks, Ford (F) and General Motors (GM) currently receive consensus "buy" recommendations from Wall Street analysts, according to Thomson Reuters.

The more lightly followed shares of Toyota (TM) and Honda (HMC), both sold here as American Depositary Receipts, are also consensus buys.

Some considerations for potential investors:

-- GM, still one-third owned by the U.S. government, has turned in five consecutive profitable quarters. Successful new models such as Buick LaCrosse allow it to increase its profit margins. Chevrolet Malibu, Cruze and Sonic are designed to compete directly against Japanese carmakers. It also has vast international sales.

-- Ford, which avoided a government bailout but faces a large debt maturity in 2013, is ahead of GM in common vehicle platforms that reduce costs. Ford Fiesta, Focus and Taurus are considered quality competitors for the Japanese brands.

The Consumer Reports 2011 Automakers Report Card ranked Ford fifth overall and ahead of the other U.S. carmakers in reliability and performance.

-- Japan's Honda and Toyota require fewer sales incentives than their Detroit rivals and their vehicles enjoy strong resale value. They ranked first and third respectively, in CR's 2011 Automakers Report Card (Subaru was second), an indication of the continued competitiveness of that country's vehicles.

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