It’s been clear for years now that those who bet on the demise of major automakers were on the wrong side of history. 

A report this week confirmed that car makers are doing just fine, thank you. About 17.5 million cars and trucks were sold in the United States last year, beating the previous record of 17.3 million set in 2000. Last year’s tally represented a 6% increase from 2014 and was up 68% from the 10.4 million sold in 2009. Americans spent a whopping $437 billion on cars and trucks last year, and that number has risen for six straight years.

#-ad_banner-#In some ways, 2015 was a perfect environment for vehicle sales. More Americans have jobs (unemployment dropped to only 5%) and gasoline prices fell sharply along with the price of oil — at year-end, the average price nationally was $2.03 a gallon, down 28 cents from the year-earlier price. And interest rates were at rock bottom most of the year, as the Federal Reserve raised interest rates only in mid-December. Meanwhile, many Americans have been deferring new-car purchases; the average car on the road is more than 11 years old.

It’s a far cry from the auto industry’s condition just seven years ago. In 2009, President Obama pushed through a bailout of both General Motors (NYSE: GM) and Chrysler, saving them from potential dissolution during the depths of the financial crisis. Both companies have roared back to life (as has Ford (NYSE: F), which received no government assistance).

Of course, the U.S. automakers are joined in this bull market for car sales by stiff competitors overseas, notably Toyota (NYSE: TM) and Honda (NYSE: HMC). So even if analysts are correct and car and truck sales top 18 million in 2017, that doesn’t mean a U.S. auto stock is the best way to play the trend.

In fact, the smarter bet is with companies that supply the components used to manufacture cars and trucks. The leaders in this group sell products and services to a range of automakers, meaning they can benefit regardless of who captures consumers’ fancy in any given year. 

What’s more, some auto-components makers are also benefiting from another powerful trend: the greening of America. As I wrote here, the Paris climate accord was a big deal that will push governments around the world to adopt environmental policies to reduce greenhouse gas emissions. One way to do that is to increase the fuel efficiency of cars and trucks through a variety of means including incentives to build more hybrid and electric cars. Companies that can help automakers meet tighter regulations will benefit over the next several years.

Here are two attractive stocks in the sector:

Gentherm (Nasdaq: THRM) broke into the auto-components market by perfecting a method for heating car seats. From there, it became a supplier of a range of climate-control products and systems to many automakers; these include heating and cooling systems, fans and blowers and related cables and electrical components. Gentherm also supplies these products to other types of customers, including makers of boats, medical equipment, bedding and military contractors.

Gentherm has a 40-year history in the climate-control business and a solid market niche, but its future growth prospects are especially exciting due to its growing expertise in technologies that will make cars more energy-efficient. For example, it has developed a thermoelectric generator that uses a car’s engine heat — two-third of which is generally lost to the atmosphere — to produce electricity. Prototypes created for BMW and Ford have proven successful, and the U.S. government is funding further research.

Gentherm also boasts a new battery thermal management system (BTM) — a thermoelectric cooling system that specializes in batteries used in hybrid and electric vehicles. The more vehicles depend on batteries rather than gasoline for energy, the more cooling will be needed to keep the batteries operating efficiently. If Gentherm can capture a significant share of this growing market — which appears to be highly competitive — its long-term growth will be greatly enhanced.

The company has a $10 million multi-year BTM contract in place and just this week announced its second contract for the BTM system with a “major automotive strategic partner” that it hasn’t yet identified. This contract, for $8 million over five years, will lead to shipments starting in model year 2018.

Gentherm trades at 16.8 times analysts’ consensus estimate for full-year 2016 earnings per share, which is an attractive valuation for this potential leader in a fast-growing market, bolstered by the auto industry’s current boom.

Visteon (NYSE: VC) is one of the largest auto-components stocks. Formerly a division of Ford, it was spun off in 2000 and now supplies many other automakers, including Renault/Nissan, Mazda, BWM, General Motors, Honda, VW and Daimler in addition to its former parent. Visteon makes a range of products, but its vision is to become the market leader in connected cockpit-electronics systems.

Analysts expect cockpit electronics to be among the fastest-growing segments of the auto-components industry in the coming years. Anyone who’s driven a car built in recent years understands the advances in “infotainment” and navigation features, connectivity, and safety functions that incorporate threat detection and other technologies. But these are expected to get even more sophisticated, including increased use of “heads up” displays and “semi-autonomous” vehicle capabilities.

As a leader in “driver experience” technologies, Visteon is poised for rapid growth as automakers increasingly compete in that space. Increased cybersecurity safeguards in cars represent another potentially huge growth area. And Visteon’s expertise in cockpit controls makes it a likely beneficiary of the shift toward more energy-efficient cars, because as these 21st century vehicles are developed, they will need cutting-edge electronics to persuade drivers to make the switch.
 
Visteon is a bit expensive at current prices, but watch the stock for a pullback below $110 as a buying opportunity.

Risks To Consider: Both stocks are sensitive to the growth of the overall auto vehicle market as well as interest rates, especially in the United States.
    
Action To Take: Buy Gentherm under $46 and Visteon below $110. 

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