Top Stories
Top Stories

Value investor says high-yield stocks may be riskier than they seem

Pzena on the markets

High-yielding sectors are not only expensive, but they may be riskier than they appear, according to top value investor Rich Pzena.

In an interview Thursday with CNBC's Scott Wapner on "Halftime Report," the founder of Pzena Investment Management explained that the market is divided into two groups, those that are in sync versus those that are out of sync with the "lower for longer" interest rate environment.

The group that believes in the "lower for longer" philosophy has valuations at "dizzying heights," Pzena said.

"You can't find a single one of those that's cheap," he said.

But these pricey valuations aren't limited to the traditional high-yield sectors like utilities. Pzena explained that it's really "any stable, low-volatility, free-cash flowing stock." Consumer staples, real estate, some health-care stocks and "higher-flying" technology names seem expensive to Pzena.

He said these kind of stocks are also riskier than they seem because they will underperform if the Federal Reserve does raise interest rates.

But those who are more confident that the U.S. central bank will raise its benchmark federal funds rate sooner rather than later "are selling for pretty attractive valuations," he said. Pzena said investors should look at companies in the financial services, energy and materials sectors.

The banks, in particular, are cheap right now with many trading below their book values, Pzena said. He also said these companies are paying dividends and buying back stock, allowing investors to cash in on a lot of the earnings.

"Their earnings can be substantially higher if interest rates go up or if they do something without interest rates going up," he said. "If you went and talked to the CEO, he would outline all the steps that he's taking to get his [return on equity] higher without interest rates going up."