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Goodbye utilities stocks, hello financials: Matrix CIO

Dividend-yielding utilities stocks have provided some of the best returns this year, but they're now looking too rich, Matrix Asset Advisors Chief Investment Officer David Katz said Tuesday.

The S&P 500 utilities sector is up more than 12 percent to lead the index this year, but with valuations at the high end of their historical range — 17.5 times earnings — Katz said he is allocating more capital to sectors that have lagged.

Financials are currently yielding dividends of 3 to 3.5 percent to utilities' 4 percent yield, but they trade at about 10 to 11 times earnings, Katz said on CNBC's "Squawk Box."

"You're going to get both the income stream, which is pretty safe we think at this point, plus you're going to get appreciation over the next year or two," he said. "If interest rates rates start to rise, banks are going to do well. Utilities are going to do poorly."

Federal Reserve policymakers indicated at their March meeting they expect to raise rates twice this year, down from an earlier estimate of four rate hikes.

Among Katz's top financial picks are Met Life, Morgan Stanley, Charles Schwab, and Wells Fargo.

The health-care sector has also been beaten up against a backdrop of campaign trail tough talk about reining in prescription prices and giving Medicare the ability to negotiate drug costs.

But Katz said he believes the outlook will improve, and he advocated buying one or two depressed health-care stocks.

He said he likes AbbVie's valuation of 11 times earnings, 4 percent yield, and portfolio of products geared toward improving quality of life over many years. He cautioned that AbbVie's primary drug, Humira, faces patent risk.

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