This past Election Day, all three recreational marijuana legalization ballot initiatives up for a vote failed to pass. That's quite a change from the success similar measures had in past election cycles. Investors sold out of North American weed stocks when the news hit. Clearly, many of them see a dark future ahead for such stocks. Could they be right?

Pot punished

Five state marijuana legalization measures were put before the electorate, three of which would have green-lighted recreational pot. As an added bonus, Massachusetts voters were asked for their yea or nay on the legalization of psychedelic substances like psilocybin and mescaline.

All three of the recreational proposals failed. Voters in both Dakotas effectively said no, as did the population of Florida. Although nearly 56% of respondents in Florida voted yes for theirs, it fell short of the 60% required for passage in that state. Meanwhile, Massachusetts voters rejected the psychedelics measure.

The Florida result was particularly stinging, as the state is the third most populous in the U.S., with more than 22 million souls calling it home.

The pot company that's absorbing the stiffest blow from this defeat is the weed leader of the Sunshine State, Trulieve Cannabis (TCNNF -1.36%). According to media reports citing campaign finance records, Trulieve contributed $140 million to Smart & Safe Florida, the political committee making the legalization push. It's little wonder that the company's shares opened 56% lower on the first post-Election Day trading session.

Although Trulieve's support was a reasonable move, the company doesn't have mountains of money to deploy. Like most other publicly traded weed companies, it has struggled with finances -- it's consistently posted net losses in recent quarters.

Trulieve has vowed to keep fighting in in home state of Florida. As of yet, however, we don't know if the company plans to continue providing meaningful financial support to that contest. That ambiguity isn't helping the stock much.

Other publicly traded cannabis companies weren't as intimately involved with any of the latest legalization efforts, and they still suffered. For example, the stock of Illinois-based manufacturer and retailer Green Thumb Industries (GTBIF 0.78%) got walloped in that Wednesday rout, as did the less directly exposed pot real estate investment trust (REIT) Innovative Industrial Properties (IIPR -3.68%).

Canadian operators weren't hurt quite as much. Regardless, some notables -- including Tilray Brands -- also took hits to their prices. After all, Tilray and certain peers have some limited operations in the U.S., so the news was disheartening for them too.

And yet...

It's easy to be very bearish on the pot sector after those votes, which suffered in compared to Election Day 2022 (in which two out of the five state measures for recreational legalization passed), and in the green triumph of 2020. That year, all four of the state proposals sailed through.

But let's look at this with a longer-term view, gazing both backward and forward. Ten years ago, widespread recreational legalization would have been inconceivable. The recent setbacks aside, approval has spread quickly and effectively enough to (somewhat) support an entire industry. Even with the recent defeats, recreational pot is fully legal in almost half of U.S. states (24, to be exact). The tally for medical weed is even higher, at 38.

Speaking of medical product, the one bright spot in the 2024 election is that, of the two votes that passed in Nebraska, one legalized medical consumption and sale. So it's not that the legalization train has stopped or reversed -- it's only slowed down.

Looking ahead, on the back of official recommendations, public sentiment overwhelmingly in favor -- and basic common sense -- the federal Drug Enforcement Agency (DEA) is considering the reclassification of marijuana from Schedule I to Schedule II.

The DEA has five such schedules, or categories, with 1 assigned to the substances with "no currently accepted medical use and a high potential for abuse." The greater numbers indicate progressively less threatening drugs, at least theoretically.

The DEA was scheduled to hold an administrative hearing on weed's rescheduling this year, but it's been pushed back to 2025 at the earliest. Yes, that's frustrating for pot advocates and those in the business, but I think it's inevitable that the lumbering agency will reclassify the green. This would, in effect, legalize recreational cannabis throughout the land.

Buy, but buy selectively

Full-on legalization is coming, in my view -- it's just not coming immediately. Therefore, all is not lost for the pot industry. In fact, now would be a good time to snap up shares of the better cannabis companies on these depressed prices. Since many continue to struggle, though, investors should be discerning and consider the ones that are in good enough shape to last until Rescheduling Day.

This means the companies that have the deepest reserves of cash resources, combined with at least some demonstrated ability to book profits and put/keep talented top managers in place.

I've been a longtime bull of Innovative Industrial Properties, as it's a good business that not only habitually makes money but (as required to keep its REIT status) pays out nearly all of its profits in the form of dividends. For now, I'd avoid Trulieve, and the Canadian operators coping with their tough domestic market. In contrast, Green Thumb looks good on the size of its coffers and relatively modest losses of late.