Picture a boxing ring in which marijuana stocks fight against each other.

In one corner, you have a marijuana producer claiming a $6.6 billion market cap, the largest production capacity in the industry, and rumors that it's being courted by the most famous beverage company in the world. In the other corner stands a little-known real estate investment trust (REIT) focusing on the cannabis industry with a market cap of less than $300 million. 

The former contender is Aurora Cannabis (ACB 0.23%), abd the latter is Innovative Industrial Properties (IIPR 0.04%). Which of these two marijuana stocks is most likely to win the match by delivering the greatest long-term returns for investors?

Marijuana plants growing in a greenhouse.

Image source: Getty Images.

The case for Aurora Cannabis

Just as announcers at boxing matches emphasize fighters' weights and heights, we have to give special attention to Aurora Cannabis' size. Thanks to a dizzying number of acquisitions over the past few years, Aurora should soon have the highest production capacity of any marijuana grower on the planet. 

This capacity is important, because more product should translate to higher revenue growth. Aurora is currently selling all of the cannabis it can ship. Capacity has also been instrumental in landing supply agreements across Canada for the country's recreational marijuana market.

There's more required to succeed in the cannabis industry than just capacity, of course. The recreational market is significantly different from the medical cannabis market. Retail expertise is needed to effectively target customers. Aurora's partnership with leading liquor retailer Alcanna is a big plus on that front. The two companies are opening retail cannabis stores in Alberta and other provinces. Aurora also made a significant investment in Alcanna.

Canada's regulations for cannabis edibles, including beverages, aren't finalized yet. But Aurora is definitely planning to enter the potentially lucrative market as soon as it can. It could very well pick up a partner from outside the cannabis industry before the time comes. 

The global medical marijuana market presents an even greater opportunity for Aurora Cannabis over the long run. Aurora's executives frequently reference investment firm Eight Capital's projection that the global marijuana market could reach $180 billion in the future. The company already operates in at least 14 countries outside Canada. The most important of these is Germany, which legalized medical cannabis last year and claims the largest marijuana market excluding North America.

In a nutshell, the investing case for Aurora Cannabis comes down to two assumptions. First, the cannabis industry will grow nearly exponentially over the next decade. Second, Aurora's scale of operations makes it one of the most likely winners.

The case for Innovative Industrial Properties

What about Innovative Industrial Properties (IIP)? It presents one of the most intriguing ways to invest in the cannabis industry.

IIP is the top U.S. REIT focused on the medical cannabis industry. The company develops properties and then leases them to tenants that operate medical cannabis businesses. There are several reasons IIP stock could appeal to investors.

The biggest drawing card for IIP is that it's targeting the U.S. market. Marijuana sales in the U.S. are projected to top $22 billion by 2022. The U.S. remains by far the world's biggest marijuana market, and IIP currently owns and leases nine properties in seven states.

There are plenty of opportunities for IIP to grow. Thirty U.S. states have legalized medical marijuana, with more potentially on the way. Moreover, small marijuana producers can find it challenging to raise the cash needed to get started, and IIP gives them a great alternative for accessing capital.

IIP appears to be in great financial shape. The company has a solid balance sheet with no debt. All of its properties are leased, with a weighted average lease length of 15 years and an average yield on invested capital of 15.7%.

In addition, IIP offers something for investors that few marijuana stocks do: a dividend. As a REIT, the company must return at least 90% of pre-tax income to shareholders in the form of dividends. IIP's dividend currently yields 3.4%. 

Better marijuana stock

Aurora Cannabis' market cap can only be defended if the global legal marijuana market increases dramatically in size and does so quickly. But as long as the company can't operate in the U.S., it's like a boxer fighting with one hand tied behind his back -- and one leg tied up as well. IIP doesn't have this limitation.

IIP shares trade at close to 21 times expected earnings. That's high compared with many stocks, but next to Aurora, it's dirt cheap. That's especially true considering Aurora hasn't generated sustained earnings yet.

Aurora has solid long-term potential, but so does IIP. Unlike Aurora, though, IIP doesn't have to wait years for its valuation to look relatively attractive based on its growth prospects.

IIP does have risks associated with the continued federal prohibition on marijuana in the United States. However, I think those risks are decreasing. My view is that this match goes to Innovative Industrial Properties. At least for now, it's the better marijuana stock.