The Russell 2000 (^RUT) is home to many small-cap stocks, offering investors the chance to uncover hidden gems before the broader market catches on. However, these companies often come with higher volatility and risk, as their smaller size makes them more vulnerable to economic downturns.

Navigating this part of the market can be tricky, which is why we built StockStory to help you separate the winners from the laggards. That said, here are three Russell 2000 stocks to steer clear of and some alternatives to watch instead.

Kohl's (KSS)

Market Cap: $1.62 billion

Founded as a corner grocery store in Milwaukee, Wisconsin, Kohl’s (NYSE: KSS) is a department store chain that sells clothing, cosmetics, electronics, and home goods.

Why Should You Dump KSS?

1. Lagging same-store sales over the past two years suggest it might have to change its pricing and marketing strategy to stimulate demand
2. Forecasted revenue decline of 5.2% for the upcoming 12 months implies demand will fall even further
3. 6× net-debt-to-EBITDA ratio makes lenders less willing to extend additional capital, potentially necessitating dilutive equity offerings

Kohl’s stock price of $14.41 implies a valuation ratio of 54.9x forward P/E. To fully understand why you should be careful with KSS, check out our full research report (it’s free).

Latham (SWIM)

Market Cap: $920.7 million

Started as a family business, Latham (NASDAQ: SWIM) is a global designer and manufacturer of in-ground residential swimming pools and related products.

Why Are We Hesitant About SWIM?

1. Annual sales declines of 7.7% for the past two years show its products and services struggled to connect with the market
2. Projected 1.7 percentage point decline in its free cash flow margin next year reflects the company’s plans to increase its investments to defend its market position
3. ROIC of 0.1% reflects management’s challenges in identifying attractive investment opportunities

Latham is trading at $7.90 per share, or 56.4x forward P/E. Read our free research report to see why you should think twice about including SWIM in your portfolio.

Cathay General Bancorp (CATY)

Market Cap: $3.34 billion

Founded in 1962 with its first branch in Los Angeles' Chinatown, Cathay General Bancorp (NASDAQ: CATY) operates Cathay Bank, providing commercial banking services to businesses and individuals with a strong presence in Asian-American communities.

Why Is CATY Not Exciting?

1. Sales tumbled by 4.4% annually over the last two years, showing market trends are working against its favor during this cycle
2. 5.4% annual net interest income growth over the last five years was slower than its banking peers
3. Net interest margin dropped by 48.3 basis points (100 basis points = 1 percentage point) over the last two years, implying the firm’s loan book profitability fell as competitors entered the market

At $48.39 per share, Cathay General Bancorp trades at 1.1x forward P/B. If you’re considering CATY for your portfolio, see our FREE research report to learn more.

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