(FORTUNE Magazine) – When you think of the hottest stocks, what pops into your head? Biotech IPOs? Think again. Much of such sexy fare turns out to be a flash in the pan. If you want a stock with staying power, try a spinoff. These are divisions or subsidiaries of big companies that have been tenderly pushed out of the nest, so to speak, to fly on their own in the stock market. Based on recent studies, they fly high indeed, handily outpacing Standard and Poor's 500-stock index. Spinoffs are usually created when the management of a large, diversified company feels that its assets -- or at least some of them -- are undervalued by the stock market. To gain recognition for those assets, management may issue shares in the subsidiary that embodies them. In most cases the new stock, representing a majority ownership interest in the subsidiary or division, is distributed tax-free to existing shareholders of the parent and begins trading in the public market. The shareholders make out because the market values the assets more highly once they are broken away from the parent. Says Scott Greiper, a principal of the Spinoff Report, a New York City research firm: ''The sum of the parts is almost always worth more than the whole.'' Evidently a lot more. According to a Pennsylvania State University study of 146 spinoffs by Patrick Cusatis, James Miles, and Randall Woolridge, spinoffs easily outperform the S&P 500 over the first three years after they are created, returning a total of 30 percentage points more than the market. Why the zip? ''These stocks are extremely underfollowed on Wall Street, so they are inefficiently priced,'' says Greiper. ''That makes them terrific investments.'' Spinoffs get off to a slow start (see chart), but don't be misled. ''It takes a while for spinoffs to be recognized by the market, but by the end of three years they are clear winners,'' concludes Cusatis. The reason for the early weakness, he notes, is heavy selling pressure by institutional shareholders of the parent company that are not allowed to hold spinoffs. This includes institutional investors who must own dividend paying stocks (spinoffs usually don't pay dividends) as well as index funds, which dump spinoffs because they are not in their indexes. But the selling pressure quickly abates, and the shares take off. The best way to play spinoffs, Greiper says, is to buy the stock of a parent company when it announces a spinoff, usually six to nine months before the deal occurs. This may seem premature, since the spinoff shares sag for a while after they are issued. But Greiper counters that early comers to the parent's stock enjoy a sufficiently high return to make it worthwhile. He's supported by the Penn State study, which shows that in the six months prior to a spinoff the parent company's shares outperform the market by seven percentage points on average. Greiper's favorite prospect right now is Home Shopping Network, which has announced that it plans to spin off its Precision Systems division, pending a favorable ruling from the Internal Revenue Service. Home Shopping's primary business is telemarketing through its Home Shopping Club, which runs marathon sales pitches for consumer products on cable TV. Its Precision Systems subsidiary has developed a voice-response computer system that allows customers to order merchandise without a salesperson by using a Touch-Tone phone. The potential business from other companies, notes Greiper, is enormous. Says he: ''I think Precision's new technology will be valued like a high-tech stock.'' One imminent deal receiving a great deal of attention is Dial's planned spinoff of GFC Financial, a commercial lending and mortgage insurance subsidiary. Dial, which owns brands such as Dial soap and Purex bleach as well as the finance company and the Greyhound bus-manufacturing business, plans to give each shareholder one share of GFC Financial for every two shares of Dial they own. B. Alex Henderson of Prudential Securities expects Dial to also spin off its busmaking business later this year, further enhancing values. Says he: ''We rate the stock a buy.'' Glenn Greenberg and John Shapiro of New York's Chieftain Capital Management like Burlington Resources, which is spinning off El Paso Natural Gas, its pipeline company. To prepare for the move, Burlington plans to sell 14% of El Paso in a public offering sometime in the next few weeks. Three to six months later the company will spin off the remainder of El Paso to Burlington shareholders. Selling some stock to the public first helps determine a valuation for El Paso and creates a ready public market for shares. Each Burlington share owned will entitle stockholders to roughly a one-quarter share of El Paso. Based on the evidence, the El Paso spinoff should be a pipeline to profits.

CHART: NOT AVAILABLE CREDIT: FORTUNE CHART/SOURCE: PENNSYLVANIA STATE UNIVERSITY CAPTION: Return to investors A WINNING PERFORMANCE Spinoffs, like the one planned by Home Shopping Network, tend to outpace the market over the first 36 months, according to a recent study.