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Ebola stocks: 2 to sell, and 5 to consider buying

My heart goes out to the nurse in Texas who contracted Ebola while treating patient zero and to all those who are affected by Ebola. We need a vaccine and a drug; great progress is being made on both fronts.

It is unfortunate that out of the Ebola tragedy, there has been so much pumping especially on two stocks on which many unsuspecting investors will end up losing their shirts. These two stocks are Lakeland Industries LAKE, +47.73% and Alpha Pro Tech APT, +35.26% They make personal protection equipment (PPE), the kind of suits and masks worn by health-care workers.

Investors are encouraged to carefully study SEC filings of these two companies, especially the balance sheets and accompanying notes. Lakeland and Apha Pro are fine companies; the issue is not the companies themselves, but the stock pumpers.

Money has moved out of Ebola drug and vaccine stocks into these two stocks. After Ebola drug and vaccine stocks were pumped to unsustainable heights, they have been dumped on the theory that it is difficult to determine which company's products will work. The argument behind Lakeland and Alpha Pro pump is that demand for PPEs will skyrocket. The argument is simple and resonates with investors who are not seasoned to guard against pumps and dumps.

Here are the six reasons why our rating at The Arora Report is a strong sell on these two stocks.

Limited financial resources

Both of these companies have very limited financial resources to quickly gear up, even if the demand skyrockets. Alpha Pro had only $8.13 million in cash and levered free cash flow of $1.3 million as of its last filings.Lakeland had cash of $6.17 million and levered free cash flow of negative $2.36 million as of its last filings.

The companies may be able to pull off secondary stock offerings taking advantage of the hype. However, it is difficult to see how a reputable investment banker could justify bringing in secondaries at the present prices of these two stocks. Alpha Pro return on assets is 4.68 %, and Lakeland return on assets is 0.61%.The companies may be able to increase their borrowings but there is a limited capacity to borrow.