Since mid-March, Cannabis stocks have rebounded 79% from the record low set by the New Cannabis Ventures Global Cannabis Stock Index, yet they remain down 28% in 2020 and 83% since early 2018, days after California legalized cannabis for adult-use.

As the coronavirus breakout was just beginning to be seen as a major threat to our health and to the economy back in March, it wasn’t clear what the implications might be for the cannabis industry, which was already struggling with a capital crunch that had intensified during the vaping crisis in late 2019. In early April, I shared some steps for readers to upgrade their exposure within the sector. I concluded that “investors should choose their cannabis stocks very carefully in this environment, trying to find those companies that will survive now and thrive with diminished competition in the future.”

By mid-May, it became clear to me that the future would indeed allow many leading cannabis companies to prosper, and I upgraded my view of the cannabis sector, sharing my bullish outlook initially with my subscribers at 420 Investor and then, as well, with readers of my weekly newsletter at New Cannabis Ventures, where I described the “Third Wave for Cannabis Stocks” that began, in my view, in mid-March. For those looking for a more detailed discussion of the past two waves, I shared the history in an article at Seeking Alpha.

Today, now almost four months into the new bull market, at least in my view, I am even more optimistic about the future for the sector, though I continue to caution that the rising tide won’t lift all boats. Two of the leading multi-state operators (MSOs) that I have discussed here at Forbes in the past, Green Thumb Industries and Trulieve Cannabis, hit 52-week highs on July 10th. Both were among the 7 cannabis stocks that had gained year-to-date as of early June.

My bullishness isn’t based on technical indicators. Instead, I see a fundamental case for the cannabis industry to perform well at a time when many industries will struggle. While I am not addressing valuations, I will say that they look more reasonable than ever. Very simply, the leading MSOs have substantially ramped up revenue and improved profitability over the past 18-24 months, yet their prices haven’t budged.

Demand Is Booming

The pandemic has boosted demand for cannabis in the legal market, something that is quite clear in recent data. In March, consumers stocked up on cannabis in all geographies, similar to what we saw in other products, and, in some markets, April levels regressed a bit. Looking past the short-term, though, indicates very strong growth. In May, BDSA data indicated surging demand across five mature Western state markets. In particular, Oregon grew a stunning 87% compared to a year ago. Its legal cannabis sales in the first five months of the year are up 51% compared to a year ago.

I have been studying the Florida medical cannabis market closely, and it has been surging as well. The state provides weekly data that details the number of patients as well as the unit volume sales of medical cannabis products and flower. The patient growth slowed a bit during the pandemic but it has accelerated sharply in recent weeks, growing 51% compared to a year ago:

What is even more impressive is that the product demand has increased even more, with THC products growing 66% over the past year and flower quadrupling.

The reasons for the increased demand across almost all markets is due to several factors. First, the pandemic itself is playing a role by giving many more time to consume cannabis but also by increasing levels of anxiety and sleep issues, which is likely driving new consumers into the market. This benefits in particular the legal cannabis market, in my view, as these new consumers are less likely to pursue the illicit market.

A more important factor, though, may be technology. Many states have allowed on a temporary basis for curbside pick up or delivery, which wasn’t allowed in many markets previously, and these measures are likely to be made permanent. New modes of delivery has enabled companies to implement online ordering, a massive advantage over the illicit market, as consumers are able to order cannabis just like they buy other types of products online. This has been enabled by several new payment processing options that allow electronic payment rather than cash, another big win for the legal market.

In addition to more convenience, many believe that the pandemic is pushing consumers to be healthier. The vaping crisis revealed a major negative for illicit market cannabis: It is not tested and can contain contaminants. So, Oregon, for example, may be seeing a shift into the legal market for this reason, though the curbside delivery is more likely the major factor.

More States Will Legalize

As 2020 began, I was optimistic about the implementation of legal cannabis in Illinois, which I discussed here as an “underapreciated cannabis stock catalyst” in late December. Indeed the program has been a great success, though supply remains constrained. My thesis was that this first state to legalize by the legislature rather than ballot initiative would trigger others to do so. Additionally, I had expected with both Michigan and Illinois now legal, we could see additional nearby states do so.

The pandemic interfered with legalization in the short-term, but it has likely sped up the overall pace of states going legal as high joblessness and soaring deficits will accelerate adoption. New York was a state considered likely to legalize through the legislative process, but it has been deferred. Looking at the East Coast, New Jersey came very close to legalizing via the legislature in 2019. Voters are likely to approve a ballot initiative in November. If approved, the pressure will increase for New York to do so. Other states that could legalize via the legislature on the East Coast include Connecticut and Pennsylvania, both of which have medical programs. There is talk that Florida, which is likely to have a ballot initiative in 2022, could also legalize through the legislative process.

The Midwest could see Minnesota, which has a medical cannabis program, join Illinois and Michigan. In the West, Arizona and Montana voters are likely to join South Dakota voters in November to consider ballot initiatives. Arizona is particularly important given the size of the state and the penetration of publicly traded companies in its current medical program. New Mexico is another state likely to extend its medical program to adult-use through the legislative process.

The Federal Government Could Become Friendlier

I have never counted on federal legalization as part of my investment thesis for the cannabis industry. In fact, it could be a threat to existing players in some scenarios. Still, there are several major impediments to growth and financial success in the state-legal federally illegal cannabis industry. Some of these barriers are downright onerous, like the federal taxation, which is known as 280E, a rule that can lead to large income tax bills for cannabis companies that are actually generating losses. Others are a bit more subtle, like banking and research.

There is no direct law that prevents state-legal cannabis companies from accessing banking services, including the ability to make deposits, but banks are reluctant to have relationships with them due to concerns about how anti-money laundering laws might be applied. Consequently, credit unions and smaller banks, with less to lose than major banks, tend to work with state-legal operators. Still, the state-legal cannabis companies have been unable to get bank loans, to trade on major exchanges or to use major credit card processors.

Over the past few years, there has been remarkable progress in Congress to at least begin addressing financial services and research, which is limited as well due to concerns that research institutions could lose federal funding. As much as the discussions have advanced and have included bi-partisan support, no legislation has moved forward, not even tackling some of the easier things to do. One thing I heard from Republican legislators during their testimony is that they don’t want to approve de facto legalization. It is very clear that many Republicans disagree, but, as long as the Republican Party controls the Senate, we are unlikely to see any barriers fall.

The November election could be a game-changer. Of course, if President Trump remains in office, any type of legislation could be vetoed. Joe Biden isn’t particularly pro-cannabis, but he would likely not interfere. Again, I am not expecting any sort of full legalization. Even if Congress wanted to legalize, it would be very complex and would take many years in my view. Still, Democrat control of the House and the Senate would be viewed very positively by investors, in my view, and a sweep that included the White House would unleash speculation like the cannabis sector hasn’t seen since late 2017.

What I would like to see would be safe harbor offered to investment banks, commercial banks, credit card processors and major exchanges. Currently, electric utilities provide power to federally illegal cannabis companies, including the illicit market as well as state-legal operators, yet they don’t, even with no safe harbor, face any repercussions. In my view, none of these financial organizations should either. Rationalization of federal cannabis laws, like the adoption of some of the previously introduced but never voted upon legislation, could allow state-legal cannabis companies to trade on major exchanges, access bank debt and accept credit cards. These actions would boost the legal cannabis market at the expense of the illicit market, raise employment, and improve safety for consumers (lab testing) and workers (no more large amounts of cash). These steps fall short of federal legalization and allow states to determine whether or not to permit commercial cannabis activities.

In conclusion, the cannabis industry seems poised to prosper going forward. This comes at a time when sentiment remains poor and valuations seem reasonable to me. Of course, cannabis remains federally illegal, making investment in the sector subject to additional risks, as the political environment can change. Weighing all of the factors, I expect cannabis stocks to perform well over the balance of 2020, particularly after Labor Day, when the elections will be more prominent in the news flow.