Linda Stern, Contributor

WASHINGTON (Reuters);

Don't worry, start shopping. Sure, the stock market is acting crazy - hitting records and then selling off in broad, dramatic movements that are whipsawing small investors and sending many screaming for the exits.

But wait! By the time the billionaire hedge-fund managers are selling their megashares, it's already too late to get out early.

Instead, learn how to buy when others are streaming out in fear. That's when stocks go on sale and you can find good companies at good prices - if you know how to look.

"When hamburgers go on sale, buy more hamburgers," says Pat Dorsey, Morningstar's director of stock analysis. His firm currently has 250 stocks on its highest ratings list, up from just over 100 in mid-July. That's because the cliff-diving that the market did over the last month took some solid companies down with it.

Here's how to play a volatile market and pick up deals while others are afraid to shop.

Looking for 'innocent bystanders'

Not every stock that was sold off in the last two weeks deserved the dump. Some shares were sold specifically because they were good-quality companies and the sellers (big hedge funds and mutual funds) needed quick cash to pay off fleeing clients. These sales present buying opportunities, suggests Schwab analyst Jeff Ryan.

Risk-averse investors can look for companies that have nothing to do with the housing and mortgage markets that prompted the most recent sell-off, according to Dorsey. "Johnson & Johnson fell from $64 to $61, and last time I checked, they didn't give mortgages to people with badcredit," he said.

Know what companies are worth. Evaluate them by comparing their prices to their earnings (the p/e ratio) and then by comparing that ratio to their rate of earnings growth, known as the PEG ratio. Know what a company's typical p/e ratio is, so if falling prices make that figure drop, you will know when you are in good-deal territory. And spend some time studying the quality of the earnings that form the basis for those ratios, Ryan said. If you want to keep pie-in-the-sky expectations out of your calculations, use p/e ratios that are based on the previous 12-month earnings of companies you are studying.

Screening

Many investment websites, (including Reuters, which distributes this column), offer screening tools that sift for stocks that are well-valued, solid earners and the like. Typically, the data on these sites are automatically updated with current market prices. Screening regularly during times of upheaval will uncover stocks that are newly priced to perform well.

Watch the stocks you already own and know what they are worth. Like a stock that the market is dumping? Buy more at a good price. See one of your favourites becoming really expensive when the market runs up? Sell a bit.

Look for stocks getting smeared by association. Not all home-building and mortgage-company stocks deserved the bad rap they got. Dorsey thinks investors who are willing to take some risks should consider some of the stronger stocks in that area.

For example, he likes Countrywide, which has fallen from more than US$40 a share to US$20 a share in the last three months, and is now selling at a price that is just over six times earnings. Countrywide may eat some bad mortgages, but it also makes about US$40 million a year just servicing mortgages. He also likes some materials companies, like U.S. Gypsum, which sell into the housing market, but have comfortable niches of their own.

Think about recession-proof companies such as banks, drug companies and consumer staples. Stock market sell-offs are a leadingindicator of economic weakness to come. Find those companies that prosper - or at least hold their own - during bad times. Pick them off on bad market days when their prices fall.

Have patience

Wait until prices are right before making your move, and then expect to hold those stocks for a while. "Will these stocks bounce 20 per cent next week? We doubt it. But will they be materially higher in three years as housing market recovers? We think so," Dorsey said.

Don't worry about trying to catch market tops and bottoms; nobody does that with perfect regularity. But if you can train yourself to buy when others are running in fear, and to sell when those same sheep are greedily knocking on the door, you will be a happy investor. Even on those stressful days.

Linda Stern is a freelance writer. Any opinions in the column are solely those of Ms. Stern. You can email her at lindastern@aol.com.