What, Exactly, IS a Darvas Stock?

by Darrin Donnelly on October 18, 2010

Nicolas Darvas searching for the next "Darvas stock."If you’re new to the Darvas System, you may be wondering what we mean here when we refer to a “Darvas” stock.

In general terms, Darvas stocks are market leaders.  Those high-flying, big-earning, fast-growing stocks that tend to lead market rallies.

In more specific terms, Darvas stocks share certain characteristics that the vast majority of publicly-traded companies do not.

To clarify those characteristics, I created an 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 each component:

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.  Therefore, the first criteria for finding a Darvas stock is to 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.

We also want to see similar earnings and sales increases PROJECTED for upcoming quarters.

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.

The Nicolas Darvas-influenced trader and founder of Investors Business Daily, William O’Neil, conducted a 50-year study on top performing stocks.  This study’s findings were published in his classic book How to Make Money in Stocks.  O’Neil found that almost all of what he labeled “the greatest growth stocks of the past years” began their runs with a Return on Equity of 17% or higher.  And just like when it comes to earnings and sales, the higher the ROE is, the better outlook for the stock.

Therefore, with the exception of rare cases when earnings or other conditions are extremely attractive, we should primarily buy stocks with a ROE of 17% of higher.

V – Volume Increasing

Is volume increasing on up days, particularly on the day when the stock breaks into new highs?

Volume can tell you so much about a stock.  Ideally, you want to see much higher-than-normal volume when a stock breaks into new highs and lower volume when the stock declines.

A – Aggressive Growth Group

Is the stock a member of an industry group that has been increasing in price more rapidly than most other groups?

At any given time in the market, there are certain groups and sectors that are very hot.  It’s always been this way and always will be this way.  Make sure your stocks are members of these hot groups.

S – Sound Base Pattern

Is the stock breaking out of a sound base pattern?

You want to buy stocks that are breaking out of old price ranges and into new, higher price ranges.  You also want to sell stocks that are falling down into lower price ranges.  These price ranges may be strictly applied Darvas Boxes or one of the other proven base patterns I showcase in my book, Secrets of the Darvas Trading System (you can actually get this book for FREE when you subscribe to Darvas Trader PRO).

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If a stock meets all of the above criteria, it is potentially a huge winner.

Remember, as Nicolas Darvas said, the only reason to buy a stock is if this price of that stock is going up.  He was only interested in stocks that could double, triple, or quadruple over the next six to 12 months.

If you concentrate your stock selections to these types of stocks, you too may soon join the growing list of Darvas Millionaires.

Unfortunately, most traders lack the discipline to stick with these strict requirements.

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Want to see a list of all the current Darvas Stocks?  Check out the latest issue of Darvas Trader PRO.  You can try out this exclusive Darvas System newsletter risk-free for 30 days.

{ 2 comments… read them below or add one }

Ricky October 18, 2010 at 11:47 am

Sounds like CANSLIM in a lot of ways. Does darvas talk about this in his book or did you coin this?

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Darrin Donnelly October 18, 2010 at 11:57 am

Hi Ricky,

Yes, it’s no accident that CANSLIM is very similar to the Darvas System. William O’Neil, the creator of CANSLIM, was heavily influenced by Nicolas Darvas and his writings.

Nicolas Darvas himself never laid out an acronym for the Darvas System or released such specific criteria for defining a Darvas stock, as I have done in this article. But based on Nicolas Darvas’ teachings AND based on the teachings of those great Darvas traders who have evolved the Darvas system over the past few decades, this D.A.R.V.A.S. acronym is the clearest and simplest definition I could create.

My hope is that it clarifies exactly what we’re looking for as Darvas traders.

Darrin Donnelly

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