We're two-and-a-half years into what may be the U.S. stock market's worst three-year period in history, and yet the brunt of the slide has happened on the Nasdaq. The declines in the Dow Jones Industrial Average and the S&P 500 have only lately begun to resemble the Nasdaq's tumble.

          7/10/02   Since 3/10/00
Nasdaq     1,346        -68%
S&P 500      920        -34%
Dow 30     8,813        -11%

       Since March 1, 2002
Nasdaq      -25%
S&P 500     -19%
Dow 30      -15%

We just experienced four wretched months in which the Dow's performance was worse than it has been since early 2000. (Early this year, the Dow actually rose above March 2000 prices, making a 15% decline this year, and an 11% decline since March 2000, possible.) So are revered blue chip stocks starting to look inexpensive? Today we consider our five holdings and 10 other blue chips.

In case you've forgotten, in the past people would sometimes describe public companies in positive terms. Blue chip means -- or meant -- that a company had made it. It was established, successful, trusted, and respected. Merck (NYSE: MRK) was a blue chip. Maybe it will be again someday.

Luckily -- or actually I won't credit five years of sincere work as merely luck -- the companies that we own are still respected and can be considered blue chips. They've typically outperformed the market indexes and their peers. They are Johnson & Johnson (NYSE: JNJ), PepsiCo (NYSE: PEP), Mellon Financial (NYSE: MEL), Intel (Nasdaq: INTC), and Paychex (Nasdaq: PAYX).

After sizable declines, how are these stocks valued? Consider prices based on earnings from the last 12 months:

Ticker  Price   P/E   P/FCF*   Yield
JNJ      $50    26     20      1.63%
PEP      $44    29     27      1.34%
MEL      $28    29     NA      1.69%
INTC     $17    64     81      0.45%
PAYX     $27    38     38      1.59%

*based on 2001 Free Cash Flow

Damn it all to hell. (I just realized that I've always wanted to write that.) None appears inexpensive yet.

Being shareholders, we might be glad that our stocks have kept rich valuations. However, as net buyers of stock over the next 15 years, we'd rather see and pay lower prices. J&J's price-to-free cash flow is the most promising of the lot, and yet its ratio could still contract considerably.

Meanwhile, dividend yields on stocks remain near record lows. This fact is most meaningful with companies such as Pepsi and J&J, because they've continued to strongly increase dividends every year, and yet we're still receiving low yields. This implies pricey valuations compared to historical yields.

Now look ahead at estimates for the year ended December 31:

Ticker  '02 EPS Est.   Change   Est. P/E  
JNJ        $2.23         16%      22.4
PEP        $1.95         13%      22.5
MEL        $1.90         21%      14.3
INTC       $0.59         15%      28.8
PAYX       $0.79         16%      35.4

What do you think?

It's worth noting that in the three weeks since we last looked at earnings projections for our companies, consensus estimates have declined for three of them: Mellon, Paychex, and Intel. Some analysts believe that current estimates are too optimistic in this climate for investment managers such as Mellon. Paychex recently reported results slightly below expectations, and Intel's consensus estimates have dropped a penny.

We have a few things to consider: 1) These estimates could continue downward. They've steadily declined since 2000 for all our companies (and most of the market), expect for J&J and Pepsi. 2) Our stocks, and blue chips in general, could easily trade with P/Es in the teens, as they often have in the past. This allows for plenty of downside risk, even now. 3) But on the positive side, earnings at most companies are depressed today (J&J and Pepsi again being exceptions), and when earnings turn higher, P/E ratios will contract, sometimes very quickly.

So, when people point to the S&P 500 at 25 times earnings and scream that it's still overpriced, keep in mind that this valuation is based on depressed earnings. In an upturn, the earnings multiple on the S&P 500 will likely shrink fast.

Now let's consider the prices of other, randomly chosen blue chips: Philip Morris (NYSE: MO), Coca-Cola (NYSE: KO), Pfizer (NYSE: PFE), Wrigley (NYSE: WWY), Dell Computer (Nasdaq: DELL), Microsoft (Nasdaq: MSFT), Cisco Systems (Nasdaq: CSCO), General Electric (NYSE: GE), Exxon Mobile (NYSE: XOM), and American Express (NYSE: AXP).

Ticker   Price   P/E     Yield
MO        $45     11     5.15%
KO        $55     35     1.46%
PFE       $31     24     1.68%
WWY       $53     32     1.53%
DELL      $24     51      NA
MSFT      $52     43      NA
CSCO      $13     90      NA
GE        $27     18     2.66%
XOM       $38     21     2.41%
AXP       $35     33     0.92%

Well, Philip Morris, and to a much lesser extent GE, are the only two that may arguably be inexpensive. Philip Morris is recommended in the new Motley Fool book, What to Do With Your Money Now. The stock still carries the lingering weight of tobacco worries. GE carries concerns about complex accounting.

Otherwise, this snapshot of leading American companies across various sectors doesn't appear cheap. The only way that the stocks could become "cheap" at these prices is if earnings rise sharply. Earnings are not the purest measure of value, but for most of these established companies, free cash flow approximates earnings. So what to do? We'll do as we've always done: Only invest gradually in select companies. Sometimes, for months at a time, that might mean sitting tight.

Next week, we see quarterly results from four of our investments. We'll decide what to do with our uninvested money afterwards. Expectations are:

          Date    EPS est.   Change
Intel     7/16     $0.11      -8.3%
J&J       7/16     $0.58     +13.7%
Pepsi     7/19     $0.52     +15.6%
Mellon    7/16     $0.47     +17.5%

You see that three of our companies announce results the same day. It's a three-way boxing match. Leeeeet's get readdddy to rummmmble!

Well, Drip Port is off to Virginia Beach to see Dave Matthews. Stay cool out there.

Jeff Fischer will be freezing his body for the weekend, in case he wants to return to life on Monday. His stock holdings are visible. The Fool has a disclosure policy.

Drip Port's Simple Returns since 7/27/97, as of 7/10/02 Market Close:

Drip Port: -11.9%
S&P 500:    -5.9%
Nasdaq:    -13.9%

These are Drip Port's straight or simple returns (including fees and our Campbell Soup loss) since launching 7/28/97 (but not accounting for the fact that we dollar-cost average, which, when accounted for, accurately increases our return by typically a few percentage points). Additionally, we've received $54.10 (worth 1% of our current value) in reinvested dividends since September 2001 that have not been recorded in our numbers yet due to functionality issues with our tracking provider. Thank you for your interest and patience.