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I continue to grow more bearish on the short term prospects of the market. Oil prices mercilessly fell Monday after a long run up, but still remain very elevated. Portugal is still working through its bailout terms with the European Union and the IMF, and Spain is now on the clock. Company profit margins are likely to be negatively impacted by rising commodity inflation and the end of QE2 could have a lot of negative consequences that are not factored into the market.

All that being said, it is imprudent to keep your entire portfolio in cash while waiting for a significant pullback; especially in an inflationary environment. One of the few areas that appear undervalued, or at least fairly valued are well run, large cap blue chip stocks that have not had the same run up as other sectors like high beta stocks and commodities. I recently ran a screen and did follow-up analysis to look for blue chips that have underperformed the overall market by at least 10% over the last six months. They also seem to have good prospects and valuations as well as offer a dividend yield of at least 3%. Here are four that meet these criteria:

Abbott Labs (ABT) is a favorite play of mine and one that I have recommended before. The company is a well-diversified healthcare product company that is selling at 11 times this year’s earnings and 10 times next year’s earnings. It yields a generous 3.8%. It has a large stable of patent-protected drugs, has a solid research and development history, and has had success in acquiring companies to fill out its portfolio. I especially like the acquisition of Solvay that gave Abbott rights to the cholesterol drugs Tricor and Trilipix, as well as provided for expansion in vaccines and emerging foreign markets

Intel (INTC) is selling at less than 10 times this year’s earnings and nine times next year’s consensus estimate. Shares yield 3.6% and Intel has raised its dividend 150% over the last five years. It has consistently beat earnings estimates by a significant amount over the past four quarters. I also believe that recent trends in “In Memory Databases” will hasten a more profitable mix of multi-core processors and DRAM server bits per box. Both would be positive for revenues and earnings for Intel and do not appear to be baked into the stock price.

Telefonica (TEF) is selling at roughly ten times both this year’s and next year’s projected earnings. It yields a very rich 5.5%. The stock has been punished due to the problems in Spain. However, the majority of its revenues come from outside Spain, primarily in Latin America; where prospects are good. In addition, the company’s efficiency efforts in Spain and throughout Europe seem to be yielding good results and offsetting revenue declines there. I believe this company is well positioned for the future and its high dividend yield puts an effective floor under the stock price.

Novartis (NVS) is an international leader in pharmaceuticals, generic drugs as well as consumer and animal health products. It is selling at a little over 10 times this year’s earnings and a little under 10 times earnings expected in 2012. It yields a solid 3.6% and the company has raised its dividend over 150% over the last five years. It has a very diversified portfolio of products that mitigates the risk of any one event (for example, product recall) from providing too much of a negative shock.

Given that I think that the market is dead money at best over the next six months, I would also look at a buy/write strategy with these stocks using slightly out of the money calls to collect additional income and mitigate portfolo volatility to some extent. Be careful out there.

Disclosure: I am long INTC.

Source: 4 Underperforming Blue Chips With Solid Valuations and Good Dividend Yields