With Republicans in the House of Representatives recently introducing legislation to legalize marijuana at the federal level, the potential for a bipartisan framework is as close as it's ever been. While the patchwork quilt of state-by-state efforts is a workaround of sorts for a growing industry, it's a poor substitute for a cohesive national policy.

The recent ruling by the South Dakota Supreme Court striking down a voter referendum approving legalized weed is a case in point. Cannabis has been a difficult market as a result, but three Motley Fool contributors think that Innovative Industrial Properties (IIPR 0.09%), the Horizons Marijuana Life Sciences Index ETF (HMLSF 0.30%), and Jazz Pharmaceuticals (JAZZ -0.83%) are top buys right now. 

Man inspecting marijuana plant.

Image source: Getty Images.

Mastering the markets for cannabis real estate and growth financing

Alex Carchidi (Innovative Industrial Properties): When it comes to cannabis stocks with an evergreen appeal, it's hard to beat Innovative Industrial Properties.  

IIP's strategy is to build a real estate empire of cannabis cultivation facilities rather than to grow marijuana for consumers to buy. With a $51 million purchase of a new property in California on Oct. 18, its empire is growing by the month. But Innovative Industrial's game is more than merely buying properties, because to generate cash flow from its holdings, it's necessary to find tenants to rent them out. And who better to occupy a piece of productive real estate than the company that sold it to IIP in the first place? 

By purchasing spaces and then renting them out to the former owner in what's called a sale-leaseback transaction, everyone wins. Innovative Industrial picks up a fresh asset, and the cannabis company gets a glob of badly needed cash, which it can then use to expand its operations.

Consistently building on rental income by buying new facilities is a business model that won't ever grow old, at least as long as the marijuana industry continues to be blocked from accessing more traditional sources of financing like bank loans. And that rental income isn't exactly small, either. IIP's revenue grew by 56.9% year over year in the third quarter, which management estimates will result in a total of $195.5 million in 2021. 

Crucially, IIP also pays a juicy dividend that currently yields around 2.31%. While that yield may not seem like it's so hot, consider that its dividend payment has grown from $0.35 per share in September of 2018 to reach $1.50 per share in September of 2021. If it keeps getting hiked at that insanely fast rate -- and with its rental income exploding, it probably will -- people who invest in IIP will be sitting on substantial returns in practically no time flat.

Marijuana production facility.

Image source: Innovative Industrial Properties.

Buy a benchmark

Eric Volkman (Horizons Marijuana Life Sciences Index ETF): In the ever-money-losing cannabis sector, eventually some companies will win, but many more will lose. Considering that, it's wise to put money in an investment that places well-informed bets on potential champions. A good one is the Horizons Marijuana Life Sciences Index ETF.

Horizons Marijuana Life Sciences is the world's original marijuana stock exchange-traded fund (ETF), having launched in April 2017, well before the formal launch of the recreational pot market in its native Canada, by the way. As it's the original and it's still going relatively strong, it's often used as a benchmark for the wider marijuana sector.

Although Horizon Marijuana Life Sciences is a Canadian security managed by a Canadian company, it has lately steered away from the many struggling businesses in that country's weed sector. As of Nov. 19, the ETF's once Maple Leaf-heavy portfolio contained only four native stocks among its top 10 holdings. The remainder -- save for Ireland's Jazz Pharmaceuticals -- are U.S. companies.

This is to management's credit, since the American market has vastly more potential than its saturated Canadian counterpart. While we shouldn't expect full, or even widely expanded, recreational decriminalization/legalization anytime soon in the U.S., in the mid- to long term it's nearly inevitable. Besides, the U.S. has nearly nine times the population of its northern neighbor.

And those U.S. holdings are promising, too. Top of the pops for Horizon, comprising over 20% of the total portfolio, is eternal weed sector star Innovative Industrial Properties. This real estate investment trust (REIT) is not only one of the very few consistently profitable marijuana titles, it also pays a regular quarterly dividend.

The other Horizon top 10 members flying the stars and stripes include specialty cultivation equipment purveyors Scotts Miracle-Gro, another profitable dividend payer, and the fast-expanding GrowGeneration.

The Horizons ETF family does include a U.S.-only cannabis title, called -- yes -- Horizons US Marijuana Index ETF. This seeks to replicate the performance of its near-namesake US Marijuana Companies Index.

While it has a clutch of potential winners in it -- Trulieve Cannabis for one, Cresco Labs for another -- it's a bit one-dimensional, as it's focused exclusively on retailers. That's why I prefer Horizons Marijuana Life Sciences out of the pair.

More than a few investors do too; so far this year, Horizon Marijuana Life Sciences as a stock is performing better than such top Canadian and American weed names as Cresco Labs, Curaleaf, and Aurora Cannabis. Once the legal environment in the U.S. starts to improve dramatically, we shouldn't be surprised if this durable ETF starts to widen that gap more dramatically.

Nurse giving a patient medication.

Image source: Getty Images.

Buying its way into cannabis

Rich Duprey (Jazz Pharmaceuticals): Jazz Pharmaceuticals isn't a typical marijuana stock because it comes from the field of biotechnology, but its $7.2 billion acquisition earlier this year of GW Pharmaceuticals puts it firmly in the cannabis camp.

Through that merger, Jazz gained access to Epidiolex, a treatment for two forms of childhood epilepsy while also gaining Food and Drug Administration approval for its use in treating tuberous sclerosis complex, a rare organ disease. The base of the therapy is cannabidiol (CBD), the non-psychotropic compound found in marijuana, and sales are regularly surpassing expectations. 

Although the COVID-19 pandemic caused new patient starts for Epidiolex to slow slightly, revenue growth remains strong. Sales were up 21% to $160 million in the third quarter and are nearly half a billion dollars year to date, putting it on track for potential blockbuster status. Four out of the five top European markets (it's approved for use in over 30 countries) are fully reimbursing Epidiolex. And with phase 3 pivotal trials for the treatment of epilepsy with myoclonic-atonic seizures -- the therapy's fourth target indication -- expected to begin in the first half of 2022, Jazz is on its way to achieving its goal of having a blockbuster drug on its hands.

The success of the CBD-based drug is bolstered by an existing billion-dollar drug, Xywav, the next-generation advancement from Xyrem, a sleep disorder treatment. The FDA granted Xywav, which has been found to be clinically superior to Xyrem, orphan drug status and a seven-year window of exclusivity. The combined sales of the two drugs totaled over $1.3 billion over the first three quarters of 2021.

Jazz also has a robust oncology platform that's generated more than half a billion dollars year to date.

At just seven times next year's estimated earnings, Jazz Pharmaceuticals looks cheap -- Wall Street expects revenue to nearly double by 2025 as it hits $4.4 billion, generating $1.6 billion in net profit, an almost sevenfold increase from the $238 million it produced last year.

That makes this marijuana stock one to consider buying right now.