Don't look now, but oft-maligned cannabis stocks aren't doing too badly these days. More than a few are seeing their stocks approach one-year highs, thanks to optimism about impending legalization and improving fundamentals.

Even after several rounds of consolidation in the industry, there are still plenty of weed stocks to consider. Among that bunch, I think the two companies that can go the distance and produce sector-beating returns for their shareholders over the next few years are Green Thumb Industries (GTBIF 3.56%) and Innovative Industrial Properties (IIPR -0.17%).

1. Green Thumb Industries

Green Thumb is an ambitious company making a concentrated effort to be a pot powerhouse. It's a Chicago-based, cannabis products maker and a multistate operator (MSO) with a 91 stores across 14 states.

Quick and opportunistic, Green Thumb was fast to establish networks of its Rise dispensaries in Minnesota and Ohio, two of the three states that legalized recreational pot in 2023.

The U.S. is currently in limbo in terms of pot laws. Although there's much support for de facto legalization nationwide, it's only being done state by state. Taxation in some of those states is ruinously high, and cannabis operations generally don't have access to basic banking services because weed remains technically illegal on the federal level. It's hard to make a buck in this business.

Yet the well-managed Green Thumb has managed to report net income in four of its past five quarters. In its third quarter of 2023, the company posted more than a 5% year-over-year improvement in revenue. Its top line exceeded $275 million for the period, which, by the way, made it the No. 2 U.S. pot company in terms of revenue, behind Curaleaf, according to industry researcher New Cannabis Ventures.

Net income in accordance with generally accepted accounting principles (GAAP) standards was $10.5 million in the quarter. Yes, that would be peanuts for many companies on the stock exchange, but in the ever-challenging world of weed, just landing in the black is quite the accomplishment. That figure, meanwhile, was 7% higher than the third-quarter 2022 result. Finally, the company ended the quarter with a decent cash and equivalents of nearly $137 million.

With that cash, Green Thumb's assertive push into new markets should continue to bear fruit, as 2024 is an election year. A recreational legalization vote could be on the ballot in populous Florida if a pending lawsuit is resolved. Pot advocates are also trying to get such a measure up for ratification in South Dakota. Legislatures in Hawaii and Pennsylvania might pull the trigger on their own before Election Day.

2. Innovative Industrial Properties

For quite some time, Innovative Industrial Properties was the only stock market-listed real estate investment trust (REIT) specializing in marijuana. Others have since arrived on the scene, so Innovative isn't as innovative anymore. Still, it remains the cannabis REIT to beat.

The company has a fairly straightforward business model. It owns and leases the properties used by various types of operators in the sector, from cultivators to processors of derivative products to retailers. As of the end of September 2023, it owned and managed 108 such properties in 19 states, 103 of which were operational and five in development.

American marijuana companies are hardy businesses, despite the headwinds. The hunger for cannabis-specific space is obviously strong, as Innovative had 98.5% of its property leased at that time. Its tenants are eager to stay for a while; its weighted-average remaining lease terms were just under 15 years.

Because there are a lot of pot companies in this country, Innovative doesn't have to depend on one or several main tenants. Renter and geographic diversification is the strategy. No single tenant represented more than 16% of annualized base rent, and no one state crossed the 15% mark. The REIT has had to deal with several tenant payment delays and defaults, but that fairly wide pool of renters meant the damage was contained.

So Innovative continues to grow. In its third quarter, it managed to boost its revenue by 10% year over year to nearly $78 million. Adjusted funds from operations (AFFO, the most closely followed profitability metric for REITs) also grew notably, advancing by almost 8% to just under $65 million. That supports the company's dividend, which at the current quarterly level of $1.82 per share yields 7.5%.

Innovative's growth isn't what it once was when the idea of a pot REIT was a novelty. Still, those growth figures are quite high for the broader REIT sector. And there's surely more to come when more states flip the recreational legalization switch on the way to what I believe will end in, effectively, the federal decriminalization of the drug.