Cannabis stocks have gotten a lot of attention on Wall Street in the past year after a handful of popular Canadian growers started hitting the U.S. markets. U.S.-listed names like Canopy Growth Corp (NYSE: CGC ), Tilray (NASDAQ: TLRY ) and Aurora Cannabis (NYSE: ACB ) get get most of the publicity.

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Path To Legalization

However, OTC-traded stocks(OTC:),(OTC:) and(OTC:) could be the best cannabis stocks to invest in.

In a new report, Roth Capital Partners analyst Scott Fortune says the cannabis industry has major long-term potential for investors. However, given the massive gains in the most popular stocks in the past year, near-term upside may be limited. Instead, Fortune says the best risk-reward skew in the cannabis space is with U.S. multi-state operators.

“In our view, the most promising public companies — i.e., those whose stocks possess the most attractive risk/reward profiles — are the U.S.-based MSOs — which are assembling dominant positions in the most lucrative U.S. states,” Fortune says.

Today, these operators are technically violating federal law, which classifies marijuana as a Schedule 1 drug. That classification also keeps these cannabis stocks from listing on the NYSE or Nasdaq exchange. However, Fortune says the STATES Act could be a game-changer for MSOs. The STATES Act wouldn’t legalize cannabis on a national level. However, it would exempt companies and individuals from federal enforcement of marijuana laws when inside states with conflicting laws.

This legislation would continue the U.S. along the path toward federal legalization and would embolden MSOs to continue to expand their operations. Fortune says once the legalization damn breaks, the financing flood waters will rush in.

“Federal protection, albeit illegal, has allowed creative risk taking entrepreneurs (MSOs) to quickly gather valuable assets ahead of an eventual large influx of capital investments,” he says.

Huge Opportunity for Cannabis Stocks

Roth estimates the $11 billion U.S. cannabis market will more than double in size — to $23.4 billion — by 2022. Ultimately, federal legalization will expand that market to at least $59 billion in size, Fortune says.

In the long term, Fortune says the social stigma of cannabis will wear off. Eventually, the drug could have a market penetration similar to alcohol today. Roughly half the adult population in the U.S. drinks alcohol. At that penetration rate, the U.S. cannabis market could eventually approach $200 billion. As of early 2019, the top 10 MSOs had a combined market capitalization of around $20 billion. Fortune says that combined market cap could balloon to around $911 billion by 2023.

Best Cannabis Stocks to Invest In

Fortune says the STATES Act will not only help eliminate cannabis marginalization, it will be a huge catalyst for MSOs. Banks located in states where cannabis is legal could be emboldened by the STATES Act and begin to finance cannabis ventures more freely. Investors will certainly see this access to capital as a bullish development. Fortune says MSO valuations could get a big boost as a result.

The largest MSO in the U.S. today is Curaleaf, which operates in 12 different states. Curaleaf has a market cap of around $4.6 billion. CURL operates 35 dispensaries, 10 processing operations and 12 cultivation sites.

The next largest U.S. cannabis MSO is Green Thumb Industries. Green Thumb operates in 9 states and has 9 manufacturing locations and 61 retail stores. GTBIF’s market cap is around $3.1 billion.

Finally, the third largest MSO stock is MedMen, which also operates in 12 states. MMNFF has roughly a $1.6 billion market cap. The company has licenses for 76 retail operations and 16 cultivation and processing sites.

In addition to the potential for organic growth among MSO cannabis stocks, the industry is consolidating at a rapid pace. Any of these three stocks could be big buyers or even targets for larger companies in the years ahead.

There’s certainly a lot to like about cannabis stocks and the cannabis industry. But investors should be careful about the buying frenzy that has taken place among the most popular names. While U.S.-listed stocks get all the publicity, CURL stock, MMNFF stock and GTBIF stock may be the cannabis stocks with the most upside.

As of this writing, Wayne Duggan did not hold a position in any of the aforementioned securities.