I  truly admire  author and trader Darrin Donnelly for bringing the system thatNicolas Darvas used to make over $2 million in the stock market into modern times by really setting more precise metrics for the Darvas system. He uses moving averages we have today to look at possible price supports in addition to the price boxes that Darvas used. Below is a concise summary of the Darvas system in an up trending market.

While O’Neil is a brilliant trader who has helped thousands make better investment decisions, I feel that there are some aspects of the CAN SLIM system that, frankly, aren’t all that important in picking winning stocks.

Therefore, we offer a new, easy-to-remember acronym for the Darvas System:

D – Direction of the Market
A – Accelerated Earnings and Sales
R – Relative Price Strength (and Return on Equity)
V – Volume Increasing
A – Aggressive Growth Group
S – Sound Base Pattern

To further explain:

D – Direction of the Market

Is the market, as a whole, in an uptrend?  It is highly unlikely that a stock will have huge gains when the overall market is in a downtrend, so make sure the direction of the market is moving upward.

A – Accelerated Earnings and Sales

Is the company seeing increases in earnings and sales this quarter compared to the same quarter last year?

Normally, you want to see stocks with at least 40% increases in earning AND sales in the most recent quarter compared to the same quarter last year.  And remember, the higher the increase in earnings and sales, the better.  If you have a choice between a stock with a 50% increase and one with a 90% increase, definitely go with the 90% increase stock.

R – Relative Price Strength (and Return on Equity)

Is the stock outperforming most other stocks in terms of its price increase?

Darvas wanted to see stocks that had at least doubled over the past year before he’d consider buying.  If a stock has already increased a great deal over the past year, most investors are fearful of a steep decline, but many studies have shown that Darvas was right in his assessment; if a stock had already made a powerful move, it proved that it had the ability to move in such a fashion and therefore, was likely to do it again.

Another important characteristic of ideal Darvas stocks is a high Return on Equity.  Fund managers love to see a high ROE.  Some put a higher value on ROE than they do earnings and sales. (more…)