Investors often talk about buying “good businesses” at attractive prices. But what exactly defines a good business? Not all companies create shareholder value in the same way—and many, in fact, fail to create much value at all over time.
In this article, I’ll talk about the difference between a “good business” and a “great business”, i.e. one that can compound shareholder’s returns at much higher rates than the market indexes.
Let’s first look at two types of companies:
Low Growth Companies - Some that Prioritize Shareholder Returns via Dividends and Share Buybacks – these are companies that generate steady cash and return most of it to shareholders. Think of companies like SiriusXM (SIRI) or Wendy’s (WEN). These low-growth businesses can still offer good investment returns when bought at the right price, but they don’t offer a lot of upside in terms of intrinsic value growth so an investor must require a high free cash flow yield to make these types of investments worthwhile.
High-Reinvestment Compounders – these are the elite few companies that are able to reinvest their cash at high returns and grow intrinsic value over long periods. Think Amazon and Netflix. These types of businesses with “reinvestment moats” are extremely difficult to find at the right price.
Buying these “high quality compounders” can still lead to poor investment performance if bought at too high of a price. By poor investment performance, I’m referring to returns that don’t outperform the market indexes over time.
The Boston Consulting Group put out a matrix categorizing businesses in four types:
Stars - These are companies that have a large or meaningful market share in a high growth market - Trex is a star since they have a greater than 60% market share in the U.S. composite decking category, and a 14% market share in the entire U.S. decking and rail market. Composite decking should have long-term growth tailwinds for many years.
Cash Cows - these companies have a large share of a low growth market - SiriusXM (SIRI) would likely be classified as a “cash cow” since it has a majority market share in the low growth satellite radio market
Question Marks - these companies have a low market share in a high growth market. These might be emerging A.I. companies or other startups that have a large market opportunity but have yet to gain meaningful market share.
Dogs - low growth share of a low growth market - Wendy’s might be somewhere between a “cash cow” and a dog. They are the 2nd largest burger chain in the U.S. but I would argue that they don’t have any competitive moat and their market share is small in the overall restaurant industry.
The multi-baggers that return 3, 5, or 10x+ will almost always be found in companies with high “reinvestment moats” or the “compounders.” If you can find a “star” at the right price, you should celebrate because these are the companies that will deliver the bulk of the returns in your stock portfolio.
Two stocks I recently analyzed illustrate this “income vs. reinvestment” contrast perfectly: Wendy’s (WEN) and Trex (TREX). It should be noted I own shares in Trex but don’t currently own any stock in Wendy’s.
Wendy’s: The “Low-Growth” Cash-Return Model
Wendy’s (WEN) is the second largest quick service restaurant burger chain in the U.S. A large majority of its restaurants are franchised, which means the company collects royalties from franchisees instead of running capital-intensive operations itself. This creates a remarkably stable and predictable stream of cash.
Wendy’s management team is guiding for roughly $1.05 in free cash flow per share in 2025, giving the stock a 13% free cash flow yield at today’s price of $8.18. Because the business has very modest reinvestment needs, most of that cash gets returned to shareholders through:
Dividends
Share buybacks
Occasional debt paydowns
When you buy Wendy’s, you’re effectively buying a stock with “bond-like” characteristics. That is, it will pay you most of the earnings it generates but the overall enterprise won’t grow much.
Your return is predominantly determined by:
The free cash flow yield at your purchase price - Assuming all the free cash flow is returned to shareholders, then most of your annual return will come from the dividend yield and share repurchases
Assuming an investor bought shares of Wendy’s on January 1, 2018, and held through the end of 2024, their annual rate of return would have been about 3.3% (including dividends).
Wendy’s stock price was actually flat during this time, so investors saw no price appreciation in the stock and their only returns were through buybacks and dividends. Wendy’s TTM free cash flow yield at the beginning of 2018 was approximately 4%. Thus, the free cash flow yield roughly projected the long-run rate of return investing in Wendy’s stock.
With these types of low-growth “cash cows,” there really isn’t any growth opportunities, so the revenue, earnings, and cash flow growth is very low (typically 0–3% or even negative).
Let’s say you purchase the stock at $8.20:
Your long-term annual rate of return would likely fall somewhere in the range of 8-12%, driven almost entirely by cash distributions (dividends and share buybacks). If share buybacks are made at prices above intrinsic value, then this return projection is likely to be too optimistic.
Wendy’s is not the type of business that will see rapid growth in its locations or the type of business that will reinvent an industry. Wendy’s is a slow-to-no growth business that only offers attractive rates of return when it’s bought very cheap.
When you buy a stock like Wendy’s or SiriusXM, you get stability and predictability, but not much in the way of long-term compounding power. Wendy’s will not be a “10 bagger” (a stock that returns 10x) — but it will consistently return cash to shareholders.
Trex: The Compounding Model
Trex represents the other end of the spectrum: a high (ROIC) compounder. These are the types of investments I prefer.
Trex manufactures composite decking—a superior alternative to wood—and has steadily taken market share for over a decade.
The company enjoys a powerful combination of moat characteristics:
Consistent 20–30% returns on equity
Strong pricing power
Cost advantages from scale and recycling processes
Brand dominance among contractors and homeowners
A long runway as the market transitions from wood to composite decking and railings
This is the classic profile of a business that can reinvest capital at high rates of return for many years.
Because Trex reinvests nearly all its earnings into growth, the stock doesn’t offer much in the way of dividends—but the trade-off is far more valuable:
Intrinsic value compounds internally at 20%+ per year. A rough proxy for growth in intrinsic value is book value per share growth.
In Berkshire Hathaway’s 1984 letter, Warren Buffett stated,
“the gain in per-share intrinsic business value is the economic measurement that really counts. But calculations of intrinsic business value are subjective. In our case, book value serves as a useful, although somewhat understated, proxy.”
Intrinsic value growth and book value growth may diverge at times, but over long periods they tend to converge—and the stock price ultimately follows. For businesses with strong reinvestment opportunities and high returns on invested capital, all three metrics generally move in the same direction.
From January 2016 - December 2024, Trex’s book value per share grew by about 27% annually. During the same time period, Trex’s stock price compounded at about 24% per year.
Why do these high quality “compounders” often trade at a premium to lower quality stocks?
The market places a premium on companies that can reinvest their earnings at high rates of return and don’t require a lot of excess capital to generate those returns.
But how do we know if a seemingly pricey “compounder” is actually cheap?
I like to look at historical price to earnings and price to book values to get a sense of how cheap these types of “quality compounders” are.
If you buy Trex at a depressed valuation—as I recently did around $33—it sets up one of the most powerful forces in investing: deep value meeting long-term compounding.
At that price, Trex traded at just 3.5× book value, compared to its historical median near 12×.
If average returns on equity (ROE) stays in the 20–30% range and the stock eventually re-rates back to a normal multiple, the expected return profile becomes extraordinary.
Reasonable scenarios show 18–30% annualized IRR over the next 3 -5 years, driven by:
Compounding book value
Pricing power
Continuous reinvestment
Multiple expansion as sentiment normalizes and the housing/construction markets improve
Unlike Wendy’s, Trex doesn’t need to pay you dividends. The business creates value internally—quietly, efficiently, and exponentially.
At a price to book value of 3.5x, Trex was trading at a 71% discount to its 10-year average when I bought it.
Using historical valuation multiples can help you judge whether a high-reinvestment business is genuinely undervalued.
This matters because, unlike slow-growth companies with limited reinvestment opportunities, high-quality compounders naturally appear more expensive at first glance.
This is why a low-growth cash generator like SiriusXM, with limited reinvestment opportunities, trades at a substantial discount to book value, while a company like Trex—able to reinvest capital at high returns—commands a premium. Both can deliver excellent investment results, but they create value in very different ways.
Two Businesses, Two Completely Different Return Engines
Comparing Wendy’s and Trex highlights the fundamental difference between cash returners and compounders.
Wendy’s Return Engine
High current free cash flow
Stable business with predictable payouts
Limited reinvestment runway
Trex’s Return Engine
High returns on invested capital
Long reinvestment runway
Secular industry growth
Large potential for multiple expansion
Compounding intrinsic value
IRR ~18–30% depending on reinvestment rate and valuation at the time of sale
Both models work—but for different types of investors, and for different roles inside a portfolio.
Which One Is “Better”?
The answer depends entirely on what you want your money to do and what stage of life you are in.
Both types of companies can deliver attractive returns when purchased at the right price, but they deliver those investment returns in a different way. Understanding these return differences is one of the most important steps an investor can take in constructing a portfolio that offers both stable income and growth potential.
If your goal is predictable, bond-like equity income with more stability, Wendy’s could be a good pick for a diversified dividend portfolio. You get stable cash flows along with cash distributions. Investors approaching retirement age often prefer these types of “dividend stocks.”
If your goal is long-term wealth compounding, Trex is in a different league. The combination of reinvestment moat + pricing power + secular growth makes it one of the rare small/mid-cap businesses capable of compounding intrinsic value at 20–30% for many years.
In other words:
Wendy’s pays you now.
Trex pays you later—and the payout can be much larger.
A balanced portfolio can include both types of stocks, but investors should recognize which engine is driving the investment returns and size their positions accordingly. Stable, dividend-paying companies are often less volatile than high-reinvestment businesses, though it’s important to emphasize that this is a tendency, not a rule.
Final Thoughts
Both Wendy’s and Trex are quality companies—but the way they create shareholder value and drive investment returns is completely different.
Wendy’s is the classic example of a company that reliably converts revenue into free cash flow and hands it back to you. It won’t grow but you’ll get a nice dividend check.
Trex is the type of company that reinvests nearly every dollar at high returns, creating exponential growth in long-term intrinsic value.
Both strategies work. The key is knowing which one you’re buying—and why.