4 blue-chip values

NEW YORK (Money) -- The stock market has gained about 15 percent over the past five months. As a result, shares of some of the top-performing companies now look expensive.

Nevertheless, you can find blue chips that are still cheap and also offer above-average potential for long-term gains.

Three stock groups look underpriced on a statistical basis.

Banks and shares of other financial companies have traded at price/earnings ratios below 13 for a long time. Stocks like Citigroup (Charts) and J.P. Morgan Chase (Charts) offer earnings growth of at least 10 percent and yields above 2.5 percent.

Drug stocks are also cheap. They don't have good growth prospects right now because of the tremendous changes taking place in the industry, including the rising competition from generics. But it's not hard to imagine a stock like Wyeth (Charts), now trading at a P/E below 15, launching some new products and recovering to the point that it can again offer double-digit growth.

The third group that is statistically cheap are the oil stocks. But their long-term returns depend largely on what happens to the price of oil. And there's no guarantee that oil prices will rebound to new highs. In fact, oil seems likely to remain below last year's peak prices.

I've written about those three sectors lots of times over the past year, and the key issues are well known. The more interesting bargains, in my view, are stocks that are cheap for their own unique reasons.

Here are four that merit a closer look, based on their current dividends and their projected earnings growth:

Burlington Northern is one of the leading U.S. railroads. After years of chronic problems, the rails are rapidly improving their performance. They are more energy-efficient than other forms of transportation. They benefit from increasing shipments of coal and ethanol, and also from increasing global trade.

And they are becoming more profitable as computers and other technology greatly increase their operating efficiency. Trading at 14.2 times estimated earnings for 2007, Burlington Northern (Charts) has a projected total return of more than 15 percent annually over the next five years.

Caterpillar shares have fallen over the past nine months because investors fear that the weak housing market and an economic slowdown will badly hurt the construction business in the U.S.

Cat (Charts) posted a small earnings gain in the fourth quarter. And the company has projected more substantial gains in 2007 thanks to overseas sales and demand from the oil & gas industry. Trading at less than 12 times estimated 2007 earnings, Cat's projected long-term return is more than 15 percent a year.

Home Depot (Charts) declined in the first half of last year because of fears that the deteriorating housing market would undercut growth at home-improvement retailers. I recently recommended the stock in Money Magazine as a contrarian buy, and the stock rebounded after the company's controversial CEO departed.

The more important fact is that the home-improvement business is doing better than expected. And some analysts think the worst is over for the housing market. At a 14.4 P/E with 12 percent projected annual earnings growth and a 2.2 percent yield, Home Depot still looks undervalued to me.

Illinois Tool Works (Charts) is a diversified companies that makes a variety of fasteners, packaging and industrial products. The shares have underperformed for most of the past year because of weakness in of ITW's markets, particularly housing and automotive.

But the company beat expectations in the fourth quarter and analysts now project a profit gain of more than 10 percent this year. One reason: ITW generates a lot of free cash flow, which has been used to buy back stock and to acquire more than 50 small companies over the past year.

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