The ugliest and most-hated stocks tend to snap back the hardest.

That's why we set up the 5 Financial Stocks Likely to Double portfolio at Stockpickr.com

Let's face it: The financial sector is hated. Thus, by definition, there must be bargains.

Surprise: You will not find Citigroup (C), Lehman Brothers (LEH), Merrill Lynch (MER), Morgan Stanley (MS) or any major financial stock here.

So let's get started.

XL Capital (XL): XL Capital is a property and casualty insurance company, which is down about 75% over the past 52 weeks due to its exposure to the insurance industry and weakening reinsurance market. However, XL is poised to snap back hard in the coming months as various financial indicators have been turning in the company's favor.

The way XL and most reinsurers make their profit is that they reinsure insurers' paper, almost acting like the "big brother," if you will, of the insurers, such as MBIA (MBI) and Ambac (ABK). XL's insurance portfolio is broken up into the following: 23% casualty, 17% property 32%, specialty (which includes environmental and aerospace) and 28% professional. For the reinsurance business, it is broken up as follows: 33% casualty, 31% property, 15% property cat., 14% other, 3% marine and energy and 1% health.

A big thing for the company is that it recently extinguished existing and reinsurance servicing agreements with Security Capital Assurance (SCA), to the tune of $65 billion. Yes, that's right: $65 billion. SCA was a huge dead weight on XL's balance sheet.

XL's diversified book of business means that it is not directly correlated to the slumping housing market or weakening economy. Its portfolio is hedged, with stakes in many different sectors.

Recently improvements in the sector include Standard & Poor's affirming Ambac's AA rating, which is a positive going forward. MBIA did not change its estimates of "stress" case losses, meaning that the company could be overcapitalized. Also, value fund Third Avenue boosted its stakes in Ambac (7% of shares outstanding) and MBIA (10%-plus shares outstanding).

All in all, XL Capital is a less risky way to play the recent 100%-plus moves in the bond insurers, while still offering substantial upside.

The basic and diluted book value per share is around $44 at June 30, 2008.

Ram Holdings (RAMR): The stock is down about 90% from its all-time high of about $17. Ram Holdings is a reinsurer for financial services firms, with a stated book value of $6 per share (it currently trades for $1.50). Everyone thinks these firms are dead because they are reinsuring all the subprime stuff from the lending companies. But this one is different. It is AAA and is only reinsuring the municipal bond CDOs held by the insurance companies. But the stock is down huge. This could have big upside.

The Bancorp (TBBK): The Bancorp is a nonbranch bank that gathers deposits through various private-label affinity partner programs nationwide and then originates small business and other commercial loans therein.

In The Bancorp's most-recent filing (which was late July), the company said: "Nonperforming loans at June 30, 2008 represented 0.63% of total assets compared to 0.58% of total assets at March 31, 2008".

So nonperforming loans only represent 0.63% of total assets. That is extremely low and a bullish sign for investors going forward. Nonperforming loans are just that: nonperforming loans that are 90 or more days late and ready to default.

There is a disconnect with The Bancorp's common stock, down about 75% for the year despite its extremely low NPL levels.

Still, even though The Bancorp grows at a 20% annualized rate and has only 0.60% of nonperforming assets/total assets and 0.12% nonconforming loans/total loans, The Bancorp trades substantially lower than its book value. This is due to the company's $350 million construction loan portfolio, which might be something to worry about. However, second-quarter 2008 appraisals came back at 5% above the original total underwriting levels, suggesting that the loans are doing better than the market believes.

With earnings historically back-end loaded due to increased merchant processing and the extremely low cost of the capital deposit base, it makes little sense how The Bancorp is sitting right on its 52-week low, trading for less than half its stated book value.

For more financial stock ideas, check out the 5 Financial Stocks Likely to Double portfoli at Stockpickr.com.

Posted on Sept. 3, 2008