Although it wasn't the green sweep that cannabis enthusiasts were hoping for, the recently passed midterm elections turned in a second-best case scenario for the marijuana legalization movement in the United States.

Entering Election Night, there were 30 states that had passed broad-based medical cannabis laws, nine of which also allowed adults to use recreational cannabis. Of these nine, eight had given the OK for the cultivation and sale of adult-use marijuana as well, with Vermont being the lone exception. Following Election Night, 32 states were now medically legal, with 10 having approved recreational weed.

A person holding a tablet and touching the screen which says legalize, with a cannabis leaf above the word.

Image source: Getty Images.

Not quite a green sweep, but close enough

As has been the case with many recent elections, medical marijuana initiatives generally passed with ease. In Missouri, where voters were tasked with choosing between three medical marijuana initiatives on their ballots, Amendment 2 received overwhelming support, with 65.5% of the yes vote. Moving forward, medical cannabis will be legal and carry a 4% sales tax. The revenue collected will with be dedicated to covering healthcare services for veterans.

The traditionally conservative state of Utah also had little trouble passing Proposition 2, which won by nearly 50,000 votes. People with qualifying illnesses will soon be allowed to purchase medical pot in Utah.

On the recreational side of the equation it was a mixed bag. On one hand, the residents of North Dakota put a monkey wrench into the green sweep plan, handily voting down Measure 3 with almost 60% against the idea of legalization. Of course, North Dakota's initiative was about more than just legalizing adult-use pot. It would also have expunged the records of those people previously convicted of a controlled substance offense in instances where that drug in question is now legal.

Then again, voters in Michigan easily approved Prop 1, legalizing recreational weed. According to Marijuana Business Daily, Michigan could generate between $1.4 billion and $1.7 billion in peak sales within a few years, making it one of the more lucrative opportunities within the United States. 

A drug free zone street sign in a quiet neighborhood.

Image source: Getty Images.

The most anti-marijuana states in the U.S.

With Utah and Missouri joining the party, so to speak, nearly two-thirds of all U.S. states have given medical marijuana the green light. But what you might not realize is that in 14 of the remaining 18 states where broad-based medical pot laws haven't been passed, there are laws on the books allowing for cannabidiol (CBD) to be used in special instances or for select ailments. CBD is the non-psychoactive cannabinoid that's best known for its perceived medical benefits.

For instance, Tennessee is one the 18 states where medical and recreational cannabis is wholly illegal. It does, however, allow for the sale of CBD oil that's derived from the hemp plant. Hemp is traditionally rich in CBD content, with only trace amount of tetrahydrocannabinol (THC), the cannabinoid known for getting a user "high." In Tennessee, properly licensed products made with CBD are legal without a prescription.  Although the laws vary a bit by state, 14 states allow for the prescription and/or sale of CBD oils or products.

On the other side of the aisle are four states that have completely banned all forms of cannabis and its cannabinoids, including CBD. You could rightly refer to these as the most anti-marijuana states.

  • Idaho
  • Kansas
  • Nebraska
  • South Dakota

Interestingly enough, Idaho, Nebraska, and South Dakota have all attempted to pass medical cannabis initiatives at some point, but failed. Kansas may take the crown as the least-friendly weed state, as there's never been any true push to legalize marijuana or CBD at any point. 

Yet it's worth noting that all four of these markets are peanuts compared to California, Florida, Colorado, and other prime pot states. Even if they choose to remain defiant to the green rush, their opposition doesn't mean much in the long-term U.S. sales potential for cannabis.

A tipped over jar filled with dried cannabis buds lying atop a small pile of cash bills.

Image source: Getty Images.

A massive investment opportunity with a boatload of risk

Ultimately, the prospect that more states will legalize recreational weed, and that perhaps a few others will join in with medical marijuana, creates an intriguing investment opportunity for those willing to stomach the above-average risk. Remember, marijuana is federally illegal, which means interstate transport isn't allowed, obtaining financing is incredibly challenging, and profitable pot companies may be subject to exorbitant income tax rates due to Section 280E of the U.S. tax code.

Of course, the rewards could be bountiful. Investment firm Cowen & Co. suggests that the U.S. market could grow to $75 billion in annual sales by 2030. That isn't peanuts, especially with the Canadian market perhaps hitting "only" $5 billion to $6 billion in sales by 2020 or 2021. The U.S. could easily be the most lucrative cannabis market in the world if not for the federal government's current stance.

Where can investors look to take advantage of this high-risk, high-reward opportunity? One avenue could be by focusing on companies that work behind the scenes (i.e., ancillary stocks). KushCo Holdings (NASDAQOTH:KSHB) is one such name that springs to mind.

KushCo is perhaps best known for its packaging, marketing, and branding operations. It provides tamper- and child-resistant packaging to more than 5,000 marijuana growers globally. More important, it works with each cannabis grower individually to ensure they remain compliant with local laws. Within the U.S., those laws can change dramatically from state to state, or even within a municipality. KushCo Holdings is an indispensable partner for the cannabis industry, and therefore a logical selection to outperform over the long run.

Niche players should also perform quite well. Origin House (NASDAQOTH:ORHOF), which until a few weeks ago was known as CannaRoyalty, is attempting to become a major player in California's cannabis distribution market. Amid the thousands of brands and hundreds of licensed dispensaries within the state, there are just a small few licensed distributors, of which Origin House is one. The company has been aggressively gobbling up licensed distributors in the state, attempting to boost its market share and generate predictable cash flow. If California's pot industry grows into the juggernaut many pundits expect, Origin House will be sitting pretty.

What states are next to legalize remains a mystery, but there's certainly an opportunity for investors to succeed.

Sean Williams has no position in any of the stocks mentioned. The Motley Fool recommends KushCo Holdings and Origin House. The Motley Fool has a disclosure policy.