Don't buy into the safety stock surge: Traders

"Safe-haven" sectors such as utilities and telecom have surged this year, but some traders believe the gains have reached their limits.

With the S&P 500 down 4 percent for the year, utilities and telecom have risen 7 and 9 percent, respectively. However, Erin Gibbs of S&P Investment Advisory said these high-dividend payers have become exceptionally expensive.

"Looking at a valuation perspective, these guys are definitely overbought," Gibbs said Monday on CNBC's "Trading Nation."

In the flight to safety this year, bond yields have fallen, making the high dividends paid by many utilities and telecom companies even more attractive to investors on a relative basis. But compared with other sectors in the S&P, utilities and telecom provide less growth potential and are trading at prices closer to analyst targets, Gibbs said. According to Gibbs, the utilities sector is currently trading at a higher price-to-earnings ratio than the broader S&P 500.

Given that the S&P's telecom sector only includes five stocks, Gibbs also advised buying individual high-yield dividend names rather than a broad sector.

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"At this point, when you look at the potential price appreciation you can get from other sectors versus these two, we really think your better returns are going to be outside of these safe stocks," she said.

Max Wolff, chief economist of Manhattan Venture Partners, agreed that the best defensive plays right now should be found outside of traditionally safe industries. He recommended taking a look at European aerospace and defense stocks, as well as health insurance stocks, which have been more badly beaten in the recent sell-off.

"I think you need to be defensive not by type, but by actual market circumstance," Wolff said Monday on "Trading Nation." "If you're overpaying to defend yourself, you're not that well-defended."

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Trading Nation is a multimedia financial news program that shows investors and traders how to use the news of the day to their advantage. This is where experts from across the financial world – including macro strategists, technical analysts, stock-pickers, and traders who specialize in options, currencies, and fixed income – come together to find the best ways to capitalize on recent developments in the market. Trading Nation: Where headlines become opportunities.

Michael Santoli

Michael Santoli joined CNBC in October 2015 as a Senior Markets Commentator, based at the network's Global Headquarters in Englewood Cliffs, N.J.  Santoli brings his extensive markets expertise to CNBC's Business Day programming, with a regular appearance on CNBC's Closing Bell (M-F, 3PM-5PM ET). In addition, he contributes to CNBC and CNBC PRO, writing regular articles and creating original digital videos.

Previously, Santoli was a Senior Columnist at Yahoo Finance, where he wrote analysis and commentary on the stock market, corporate news and the economy. He also appeared on Yahoo Finance video programs, where he offered insights on the most important business stories of the day, and was a regular contributor to CNBC and other networks.

Follow Michael Santoli on Twitter @michaelsantoli

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