The Wall Street Journal-20080112-breakingviews-com - Financial Insight- RiskMetrics- a Decent Bet- IPO Comes Just as Bankers Display Weakness in Field- And Few Rivals Are Public

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breakingviews.com / Financial Insight: RiskMetrics: a Decent Bet; IPO Comes Just as Bankers Display Weakness in Field, And Few Rivals Are Public

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You can't manage what you can't measure. Or so bank executives like to say.

So the initial public offering of stock in RiskMetrics, one of the leading firms in financial risk measurement, looks well-timed, given it has become clear that banks are having trouble measuring their risks themselves. For investors looking for a play on Wall Street's new probity, RiskMetrics' stock will be one of the only games in town.

The expected IPO price range of $17 to $19 would put its earnings multiple more or less in line with financial-data and analysis competitors like DST Systems. But RiskMetrics, which was originally J.P. Morgan's risk-research group before being spun off in 1998, is no longer just a wonky quant shop. It also owns ISS, the proxy-advisory firm, which it bought last year.

Its stock could benefit from a couple factors. First, RiskMetrics' main business lines are market leaders. And the shares of most of its biggest competitors in the financial-risk-analytics game are, well, riskier. Algorithmics, a similar firm, is owned by French finance group Fimalac, which also owns Fitch Ratings. Fimalac's stock has lost nearly half its value in the past six months as a result of rating- service woes and the credit crunch.

KMV, a credit-risk-analysis firm, is owned by Moody's Investors Service, which faces similar problems. Measurisk is owned by Bear Stearns, which isn't the greatest endorsement right now.

Meanwhile, SunGard -- which does a bit of everything -- is private. And Barra, which is respected for its equity analytics, is subsumed within index titan MSCI, which recently went public.

Those looking for a play on improving corporate governance also don't have many other options. Other institutional shareholder- advisory firms like Glass Lewis and Proxy Governance are private.

Of course, investing in the parent of ISS may have other advantages. It should guarantee that RiskMetrics' own management won't cut corners when it comes to governance.

Insider Buying Boom

Stockholders have plenty to worry about this year. But one group appears considerably more confident than the rest of the crowd: Stock purchases by company executives and directors are close to all-time highs.

While these purchases can sometimes throw off false bullish signals, they can help investors spot potential winners in turbulent markets.

Twenty-two of the S&P 500 index constituents had net insider purchases of at least 50,000 shares in the past six months, according to Reuters Knowledge. Not surprisingly, the list includes many companies from downtrodden sectors such as retail (including Dillard's, Limited Brands and Sears Holdings) and financial firms. The latter list includes several regional lenders, such as North Carolina's BB&T and Wachovia.

Insider buying isn't a foolproof signal. Executives and directors often make token purchases, particularly in relation to their wealth, to boost morale when the going gets tough.

And while insiders may have access to better information, their timing can still be lousy. As the credit crunch unfolded last summer, executives at Thornburg Mortgage loaded up on shares in the mid-$20s, only to see them plunge below $8 less than a month later.

But when coupled with reasonable valuations and solid fundamentals, a high level of insider buying can be a useful indicator. Take Starwood Hotels, which operates the upscale W Hotels. Analysts are skeptical about the $8 billion hotelier's prospects this year, but expect earnings to rebound more than 35% in 2009. At a recent $40 a share, Starwood sells for just 12 times 2009 forecast earnings, and executives are piling in.

General Electric's insiders -- including Chief Executive Jeff Immelt -- have also been loading up on GE shares, which fetch a reasonable 15 times earnings.

One difficult aspect to picking stocks in a choppy market is separating the overall malaise from each company's fortunes. Keeping an eye on which insiders are exploiting deflated stock prices to snap up their shares is one way to tease out the best opportunities.

-- Dwight Cass and John Christy

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This column is by breakingviews.com, an online financial commentary site.

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