This event is one of the simplest, yet most often misunderstood ways for investors to beat the market.

It can be tough to determine when or if this event will happen. But when it does, more often than not, investors make out like bandits.

#-ad_banner-#I’m talking about spinoffs, which can happen for a variety of reasons…

Sometimes they are done to trim the loose parts of a company after a major acquisition in order to satisfy anti-trust requirements. Other times, spinoffs are undertaken to resolve friction or conflicts of interest between a subsidiary and parent.

Smaller subsidiaries or business units often lose out on the full recognition that they deserve only because they get overshadowed by the parent company. Once they are spun off, the market can truly appreciate their value.

Some spinoffs need time to develop before they can fire on all cylinders, but once they do, history has proven that these new firms tend to outperform the market.

Consider this:

Both Marathon Petroleum (NYSE: MPC) and Huntington Ingalls (NYSE: HII) plodded along for a year or two after they were spun off as standalone companies. But they eventually hit their stride.

Analysts have underestimated Huntington’s earnings by more than 10% in each of the last four quarters. After its spinoff from parent company Northrop Grumman Corp. (NYSE: NOC) in March 2011, Huntington’s shares have increased more than 228%, far outperforming the S&P 500’s 66% return over the period.

The chart below shows Huntington’s performance compared with the broader market as well as its former parent, Northrop Grumman.
 

Marathon, meanwhile, has been a little more of a mixed bag. But analysts underestimated its second-quarter 2014 earnings by more than 30% and misjudged its fourth-quarter 2013 earnings by more than 80%.

After its spinoff from parent company Marathon Oil Corp. (NYSE: MRO) in June 2011, MPC’s shares have increased 180%, far outperforming the S&P 500’s 57% return over the period. The parent company’s shares, meanwhile, have fallen 7%.

Spinoffs tend to be misjudged by analysts, but they can outperform the broader market and lead to big gains for investors. But you have to be patient.

I recently recommended another spinoff to readers of my premium service, Stock of the Month. I’ve been quietly tracking the firm since its spinoff, and now I’m finally ready to see my patience pay off.

The stock was officially launched as a new company in late 2011 and includes dozens of well-known global water infrastructure brands. But you could hardly call it a young or inexperienced company.

I’ve had my eye on this firm for a while, but I didn’t want to jump right in. I thought it might take some time for all the different brands to come together as one company.

I also wanted to wait until the finances for U.S. state and local governments had stabilized. The U.S. makes up roughly a third of this company’s revenues. Water infrastructure systems aren’t cheap, and revenues are sensitive to global economic conditions.

This firm did underperform for the first couple of years as a “new” company. But, in 2014, the company hit its stride and that’s why I now rate this company as a “buy.”

Unfortunately, I don’t have time to tell you more about this company today, but the key takeaway is that spinoffs are a powerful, often overlooked aspect of the market and they have proven to return huge gains to patient investors.

And that is what my Stock of the Month newsletter is really all about: patience, good timing and disciplined portfolio management. Buying on a whim and selling at the wrong time are some of the easiest mistakes an investor can make, but with a few simple rules these errors can be avoided. With a little timing and discipline, anyone can benefit from a well-managed portfolio. If you’d like to learn more about Stock of the Month, visit this link.