Apple's Valuation Is Compelling, But Don't Expect to Get Rich

There is no doubt that Apple (NASDAQ: AAPL  )  is one of the best-valued stocks one can buy these days, not only from a balance-sheet perspective, but also from an EPS and dividend perspective. As things stand, Apple's stock has a trailing P/E of 14 and a forward 12-month P/E of around 12.5. In addition, the forward annual dividend yield of Apple's stock is about 2.2%. So on the one hand we have a relatively good -- if not outright cheap -- valuation and a decent dividend yield.

But don't hold your breath if you are planning on getting rich buying Apple's stock. Analysts have a forward 12-month target of $627 per share, which is about 5% higher than current levels. If you add the 2% dividend, you can probably expect to make about 7%, which is not bad.

But Apple has several aces up its sleeve that might surprise to the upside, and investors might end up doing better than what most analysts think. Here are some of Apple's aces.

Wearable devices
To begin with, there has been a lot of talk about the wearable devices space recently. Many analyzing the acquisitions Apple has made over the past 18 months or so say that Apple is acquiring companies with the technology to help it enter the wearable devices space.

While there is a lot of speculation on how big this space might be in the future, consulting firm IHS thinks the wearable space will be a $30 billion industry by 2018. And by wearable space, we mean health-care and medical devices, fitness and wellness, infotainment, industrial, and military. 

One thing is certain, smartphones are radically changing the way we go about our daily lives. In fact, as time goes by, chances are that our smartphones will play an even bigger role in our daily activity. And as far as the IHS report, the $30 billion number might prove to be on the low side.

The iPhone 6 will be a game changer
For a long time now one major complaint from Apple fans has been that the iPhone is just too small. In fact, one of the reasons Samsung (NASDAQOTH: SSNLF  ) is the leader in the space is because it makes larger-screen phones. See, while you could surf the Internet with an iPhone, it's not that easy to do. It would be much easier if you surfed on a 5-inch device.

In fact, one of the reasons why BlackBerry's (NASDAQ: BBRY  )  new Z3, code-named Jakarta, sold out on its first day in Indonesia is because it was a 5-inch device. And when one looks at the Chinese smartphone market these days, the vast majority of devices are 5-inch devices. 

It is rumored that the iPhone 6 will come in two flavors, a 4.7-inch device and 5.5-inch device. If this is confirmed, then it is a game changer for Apple. The 4.7-inch device is very comfortable in the hand and not that large so you can't put in your pocket, while at the same time giving users a comfortable Internet-surfing experience, and the 5.5-inch device will be large enough for users who don't mind the larger size, because they are heavy Internet users.

My guess is that when the iPhone 6 starts selling, it will not only be an instant success, but for the first time in a while, Apple might take market share from Samsung.

Share repurchases
One of the best reasons to buy a stock is because of its EPS growth. As you can see from the chart below, Apple is repurchasing shares and reducing its float. This means that even if Apple does not increase overall profits at the corporate level over the next several years, it should be able to increase EPS because of these repurchases.

AAPL Shares Outstanding Chart

AAPL Shares Outstanding data by YCharts

Apple still produces billions in free cash flow each quarter and has more than $150 billion on its balance sheet. So unless something really bad happens to the company in the near future, it would be safe to guess that Apple will continue repurchasing shares for the foreseeable future.

Bottom line
While you will not get rich buying Apple at these levels, it is one of the cheapest technology stocks on the market, which also makes it a very good proposition for long-term investors who don't look at the tape on a daily basis and don't want to take big risks.

Investors might do better than most analysts think if the wearable devices industry takes off, if the iPhone 6 does well, and if Apple continues repurchasing shares at today's levels

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Leaked: Apple's Next Smart Device
(Warning, it may shock you)
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