One of the challenges of managing your own individual stock portfolio is that you always have to be on guard. Ongoing research and review is necessary to keep abreast of developments that may relatively quickly render a stock undesirable.

#-ad_banner-#This reminds me of one former superstar in particular, a stock I’m sure many investors became complacent about because it did so well for so long. Indeed, from the end of February 2009 to mid-May 2011, the price nearly quintupled from about $18 to just over $85.

But since then, shares have taken an ugly dive, slumping more than 70% to the current price of about $22 a share.

To this stock’s credit, the plunge wasn’t straight down. During the past several years, shares have staged multiple comebacks because the underlying company is well-known and still has many loyal customers. The latest rally occurred May 1, when the stock spiked about 20% after management reported quarterly sales and earnings that weren’t as bad as analysts expected.

I’m referring to Weight Watchers International (NYSE: WTW), long a leading global provider of weight-management services through an extensive network of company-owned and franchise operations.

My colleague Dave Goodboy was bullish on Weight Watchers when he profiled the company in December. I’m bearish on the stock, but Dave and I do agree on one thing: It’s highly speculative at this point.

Mind you, the company had a great run from 2009 to 2011, as the economy gradually improved and consumers became more willing to shell out cash for weight-management service. During that two-year period, sales were up 30%, to more than $1.8 billion, and earnings per share (EPS) soared 79%, from $2.30 to $4.11.

But as I said, things can change pretty quickly, and for Weight Watchers they have.

Since 2011, the top line has fallen about 5% to $1.7 billion. The bottom line is down even worse — nearly 12% to $3.63.

	Flickr/slgc
	Weight Watchers is feeling the impact from competition. In the latest quarter, the number of active subscribers plummeted 20% to 2.4 million.

In my view, a huge issue for Weight Watchers is relevance — and unfortunately that’s decreasing. The most telling sign of this is meeting attendance, which has shrunk 37% in the past few years. Essentially, the firm’s signature business model of weekly face-to-face contact with a trained consultant and a support group of other dieters just isn’t cutting it anymore.

There are several reasons for this, and one is simply that the world is changing. Lately, there’s been a proliferation of more convenient options like MyFitnessPal, an online platform that helps users track and facilitate diet and exercise. There are now many apps for mobile devices designed for this, too, with FatSecret, Cron-o-meter, Zombies Run!, and Pocket Yoga being just four of the most recent examples. 

Weight Watchers has, of course, noticed all the new competition because it’s clearly hurting business. In the latest quarter, for instance, the number of active subscribers plummeted 20% to 2.4 million from nearly 3 million in the prior year. Quarterly sales declined 17% from the year before, to $409 million.

Had Weight Watchers been more proactive about keeping up with new technologies, it might have been able to adapt sooner and minimize the damage of the past few years. It’s finally attempting to get with times, though, by creating its own personalized and on-demand services integrating face-to-face contact, online and mobile access, and wearable devices. The thing is, it’s too soon to say how successful these efforts will be.

Even if the company does a great job of integrating new technologies into its format, it still faces one major obstacle — its services cost money, and they aren’t cheap (anywhere from about $20 to $40 a month, depending on the service). The competing online services and mobile apps that have been eroding the firm’s market share are typically free, and that’s pretty tough to beat.

So the big question in my mind is can Weight Watchers lure back lost customers and restore sales and profit growth with a platform people have to pay for? It’ll be an uphill battle for sure. Consumers tend to view weight-management services as discretionary and, in my opinion, they’ll typically be more inclined toward free options — especially since household incomes have long been stagnant or declining and money remains tight for so much of the population.

Risks to Consider: Along with the issues I’ve already described, it’s important to be aware of Weight Watcher’s dividend situation. Because of its troubles, the company suspended its payout late last year to conserve cash. That isn’t a good sign.

Action to Take –> I’m not saying Weight Watchers can’t get back on track. Far stranger things have happened, but I am very dubious. Analysts are projecting at least a couple more years of double-digit declines in revenue and EPS shrinkage of as much as 28% a year for the next five years, unless the company can correct the deficits in its business model.

This implies the potential for the stock to plummet another 70% to about $7.30, assuming a price-to-earnings (P/E) ratio around the historical value of 12. The carnage could be far worse if the P/E stays at the current level of about 7.

This is something of a worst-case scenario, although things might play out that badly if turnaround efforts are totally botched. However, I could also see the firm and its stock simply treading water for the foreseeable future. Either way, I’d avoid Weight Watchers until it becomes clear it can re-establish healthy sales and earnings growth.

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