Shares: Hi-tech produces a virtual certainty for 1994: Leading-edge technologies offer fledgling companies the prospect of huge and recurring returns

WHEN private investors are piling into the market, they invariably respond to stocks that have a good story. Best of all are stocks where the action is coming next year or later, and there are no short-term complications such as earnings and dividends to inhibit the soaring imagination.

The UK stock market has an increasingly rich crop of such 'concept' investments, which are being floated against a backdrop of momentous technological developments that are probably going to change all our lives between now and the end of the century.

Three presently loss-making stocks should enjoy dramatic activity this year in fields where the sky is the limit, and they should appeal to investors who like to be with the action.

The classic investment of this type is the just-floated Virtuality, which at 331p against a 170p flotation price is already valued at nearly pounds 80m. This company is the brainchild of a 33-year-old Indiana Jones look- alike and not-so-mad boffin, Dr Jonathan Waldern, who realised a decade ago that there was huge potential for low-cost applications born of the space-age technology that enables pilots to see instrument readings on special visors.

Based on its success in bringing costs down, the group has generated pounds 10m in recent years from selling 350 integrated virtual reality systems for use in arcades. In the process, it has created the hardware, the operating software (analogous to MS-DOS and Windows on computers) and software applications such as games to make itself an - albeit embryonic - virtual reality version of the computer software giant, Microsoft. Both IBM and Motorola have stakes in the company.

But the real potential comes not from expanding sales of integrated systems but from licensing the technology to large partners with the financial muscle and presence to develop mass markets. The resulting royalties, combined with a modest cost structure, would generate spectacular profits growth. For example, the group is in partnership with the Japanese games giant Sega, which is planning to build a chain of 50 small theme parks making extensive use of 3D touch-and-feel virtual reality. The theory is that it is cheaper, to simulate a 'white- knuckle' ride than to actually build one, but just as exciting.

The group's stockbroker, Beeson Gregory, is forecasting profits of pounds 1.1m for 1994, after a loss for 1993, to put the shares on a price-earnings ratio of 75. Optimists may reflect that the other games giant, Nintendo, made profits of pounds 750m last year although it has just 879 employees, with manufacturing, hardware and software development contracted out - exactly the game-plan of Virtuality. What is certain is that Dr Waldern's company is an early player with proprietary technology in what promises to become a vast market. That justifies a high valuation.

Another new market at the dawn of what could be a phase of spectacular growth is on-line information, whereby computers become terminals to access information networks and databases via telephone, cable and satellite links. City folk are already familiar with such networks for share and stock market data. But that is just the tip of the iceberg.

Two quoted companies with great ambitions in this field are PhoneLink, at 364p for a market capitalisation approaching pounds 120m, and the even more recently floated On Demand Information, at 113p for a valuation of pounds 56.1m. Part of the excitement in both cases is that if the companies are successful they will generate large and recurring profit streams.

The key to prospects at PhoneLink is its on-line data service, Tel-Me, which is to be launched early this year. The company is already generating revenue from its automated phone-number accessing system for large companies, and its technology is at the heart of British Telecom's recently launched TeleDirectory service, which gives users low-cost access to phone numbers via computers. But the serious money is intended to be made by Tel-Me, which will enable subscribers (paying pounds 300 a year to be linked up to the system) to access data quickly and cheaply from a range of sources (10 initially) including as the AA, British Rail and Ordnance Survey. For instance, small business users will be able, in seconds, to look up hotels, weather reports and detailed maps and, as the user base builds up, use the system interactively to make reservations. The company is arguing, with some justification, that Tel-Me provides the 'killer application' that is going to bring on-line computer services to every small business, if not eventually every home. Tel-Me works in the increasingly familiar Windows environment. From early 1994, all new IBM PCs will be available with Tel-Me and Windows. The service can be installed on any IBM-compatible PC.

On Demand Information is the brainchild of Graham Poulter, who believes there is huge scope for specialised on-line database services, having already built Poulter Communications, founded in 1969, into a substantial marketing services company. The group has just launched its first product, a service for surveyors, builders and architects developed jointly with the Building Centre.

Information will appear on- screen exactly as it does on the page, ready for a hard-copy printout if required. The convenience and ease of updating is obvious, suggesting the product could be a huge success, with many further applications to follow. The ultimate scope is suggested by a recent report that the European market for electronic information could reach pounds 16bn by 2000. (Photograph omitted)