If you think it's a challenging time for Wall Street, take a closer look at how poorly marijuana stocks have performed since February 2021. With federal cannabis reforms failing to materialize, pot stocks quickly went from the hottest thing on Wall Street to absolute buzzkills. But that may be about to change.

Last week, President Joe Biden made an address on marijuana that involved pardoning simple cannabis possession offenses, and encouraged Attorney General Merrick Garland and Health and Human Services Secretary Xavier Becerra to review marijuana's current scheduling under the Controlled Substances Act. In other words, the president took the first steps to potentially legalizing marijuana at the federal level.  

An up-close view of a flowering cannabis plant growing in an indoor commercial cultivation farm.

Image source: Getty Images.

Cannabis is a massive global opportunity. Research firm BDSA has forecast a compound annual growth rate of more than 16% for the industry through 2026. If accurate, the global weed market would be worth $61 billion in 2026, with a majority of these sales originating in the United States. In other words, the beatdown that pot stocks have endured has rolled out the red carpet for opportunistic investors.

Here are two marijuana stocks investors can confidently buy hand over fist, as well as two other pot stocks that might look like intriguing values, but should be avoided like the plague.

Marijuana stock No. 1 to buy hand over fist: Innovative Industrial Properties

The first weed stock that investors should have no issue buying hand over fist during the bear market pullback is cannabis-focused real estate investment trust (REIT) Innovative Industrial Properties (IIPR 1.22%).

Just like any REIT, IIP, as Innovative Industrial Properties is more commonly known, aims to buy properties that it can lease for a lengthy period. The only difference is that IIP is looking to acquire and lease medical marijuana cultivation and processing facilities. Since marijuana is federally illicit, cannabis can't be transported across state lines. This means there's a big need for cultivation and processing facilities in all legalized states.

As of early September, IIP owned 111 properties spanning 8.7 million square feet of rentable space in 19 legalized states.  Given that many of its leases are for 10 to 20 years, the cash flow it's generating is highly predictable. Through the midpoint of 2022, IIP was collecting 99% of its rents on time.

Interestingly, the lack of cannabis reform on Capitol Hill has actually been a positive for Innovative industrial Properties. With weed illegal at the federal level, access to credit markets has been spotty for pot stocks. IIP has stepped in with its sale-leaseback program to allay these concerns. IIP acquires facilities with cash and immediately leases these properties back to the seller. It's a win-win that puts cash in the pockets of multi-state operators (MSOs) while landing IIP long-term tenants.

Innovative Industrial Properties is sporting a forward P/E of 15 and a yield of nearly 8%. That makes it an incredible buy for growth, value, and income investors alike.

Marijuana stock No. 2 to buy hand over fist: Cresco Labs

A second marijuana stock to buy hand over fist at the moment is U.S. MSO Cresco Labs (CRLBF 1.36%). Despite a lack of cannabis reform progress in the U.S., Cresco Labs has three catalysts that can send its shares notably higher.

First, Cresco's retail expansion is predominantly focused on limited-license markets. Although it's in a number of high-dollar states, entering limited-license markets is a strategically smart move. States where regulators limit how many dispensary licenses are issued in total, as well as to a single company, ensures that (currently) smaller retail players like Cresco have an opportunity to build up their brands and garner a loyal following.

The second big catalyst is the pending acquisition of MSO Columbia Care (CCHWF 3.06%). Assuming this all-share buyout completes in the coming weeks, the combined company will have over 130 operating dispensaries spanning 18 states. For context, Cresco has 51 open dispensaries in 10 states right now. A bigger retail footprint would certainly be a long-term positive for the company.

Third, Cresco Labs has the industry's leading wholesale cannabis segment. Wall Street isn't a big fan of wholesale operations because of their lower margins, compared to the retail side of the equation. But Cresco has volume on its side. It holds one of only a few cannabis distribution licenses in California, which allows it to place its proprietary pot products into more than 575 dispensaries throughout the Golden State.

Assuming its merger with Columbia Care goes smoothly, Cresco Labs could quickly become a juggernaut in the U.S. MSO landscape.

A smoldering dried cannabis bud that's beginning to turn black.

Image source: Getty Images.

Pot stock No. 1 to avoid like the plague: Aurora Cannabis

But just because marijuana is shaping up to be one of the fastest-growing industries of the decade doesn't mean every pot stock is worth buying. Canadian licensed producer Aurora Cannabis (ACB 3.26%) is exhibit 1A of why you shouldn't blindly invest in a fast-paced industry.

As recently as 2019, Aurora Cannabis was believed to have a shot at becoming the world's most prominent pot stock. It had 15 potential production facilities and was expected to lean on exports to move what could easily have been well over 600,000 kilos of annual output. Unfortunately, this utopian scenario didn't even come close to fruition.

Over the past three years, Aurora Cannabis has closed production facilities, completely written down billions of dollars in goodwill after making roughly a dozen grossly overpriced acquisitions, and slashed its selling, general, and administrative expenses. Even with these actions, the company continues to lose money. A combination of Canadian consumers favoring lower-margin dried cannabis flower and regulators slow-stepping the rollout of dispensary licenses in Ontario have ensured ongoing losses for Aurora.

To make matters worse for its shareholders, Aurora Cannabis's only means to raise capital has been to persistently issue shares of its common stock. Between June 30, 2014, and June 30, 2022, the company's reverse-split-adjusted outstanding share count ballooned from about 1.3 million to approximately 297.8 million. The magnitude of this dilution, coupled with its chronic operating underperformance, has Aurora Cannabis stock on the verge of dipping below $1 per share once more.

Although it was once a highly popular pot stock, Aurora Cannabis is absolutely a stock to avoid in the fast-paced weed industry.

Pot stock No. 2 to avoid like the plague: SNDL

The second pot stock to avoid like the plague is none other than SNDL (SNDL 1.83%), the company formerly known as Sundial Growers. Though SNDL is a favorite of retail traders and meme investors, there's very little that's redeeming about the company.

When SNDL first became a publicly traded company in 2019, it was relatively undecipherable from other Canadian pot stocks. It primarily focused on wholesale cannabis, with management making the decision not long thereafter to pivot to retail sales because of its higher margin potential.

What's made SNDL such a popular but polarizing business is its capital-raising activities. Starting Oct. 1, 2020, SNDL began selling stock to raise cash and pay off its debt. But the company didn't stop once it secured the capital to cover its outstanding debt. In less than two years, SNDL's share count soared from a pre-split 509 million to about 2.33 billion. Not surprisingly, SNDL spent a year rangebound between $0.30 and $0.90 before enacting a 1-for-10 reverse split to remain listed on the Nasdaq stock exchange.

While it's understandable that some investors appreciate SNDL's hearty cash position and its desire to buy other marijuana businesses, management raised this capital with no particular plan in mind. Following a couple of acquisitions, SNDL's outlook remains cloudy. The company's cash pile has shrunk as losses have continued, which raises the likelihood that SNDL could turn to additional stock issuances to boost its cash position.

With the risk of ongoing dilution being a constant menace, investors would be wise to keep their distance from SNDL.