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Small-cap stocks in the Russell 2000 can be a goldmine for investors looking beyond the usual large-cap names. But with less stability and fewer resources than their bigger counterparts, these companies face steeper challenges in scaling their businesses.

Picking the right small caps isn’t easy, and that’s exactly why StockStory exists - to help you focus on the best opportunities. That said, here are three Russell 2000 stocks that don’t make the cut and some better choices instead.

PagerDuty (PD)

Market Cap: $1.67 billion

Started by three former Amazon engineers, PagerDuty (NYSE:PD) is a software-as-a-service platform that helps companies respond to IT incidents fast and make sure that any downtime is minimized.

Why Are We Cautious About PD?

1. Offerings struggled to generate meaningful interest as its average billings growth of 8.1% over the last year did not impress

2. Historical operating losses point to an inefficient cost structure

3. Capital intensity will likely ramp up in the next year as its free cash flow margin is expected to contract by 3.3 percentage points

PagerDuty is trading at $17.09 per share, or 3.3x forward price-to-sales. Read our free research report to see why you should think twice about including PD in your portfolio, it’s free.

Sonos (SONO)

Market Cap: $1.28 billion

A pioneer in connected home audio systems, Sonos (NASDAQ:SONO) offers a range of premium wireless speakers and sound systems.

Why Do We Pass on SONO?

1. Annual revenue declines of 9.1% over the last two years indicate problems with its market positioning

2. Poor expense management has led to operating losses

3. Performance over the past five years shows its incremental sales were much less profitable, as its earnings per share fell by 5.8% annually

Sonos’s stock price of $9.99 implies a valuation ratio of 18.2x forward price-to-earnings. Dive into our free research report to see why there are better opportunities than SONO.

Owens & Minor (OMI)

Market Cap: $707.6 million

With roots dating back to 1882 and operations spanning approximately 80 countries, Owens & Minor (NYSE:OMI) is a healthcare solutions company that manufactures medical supplies, distributes products to healthcare providers, and delivers medical equipment directly to patients.

Why Are We Hesitant About OMI?

1. Large revenue base makes it harder to increase sales quickly, and its annual revenue growth of 3% over the last five years was below our standards for the healthcare sector

2. ROIC of 4% reflects management’s challenges in identifying attractive investment opportunities, and its shrinking returns suggest its past profit sources are losing steam

3. Shrinking returns on capital from an already weak position reveal that neither previous nor ongoing investments are yielding the desired results