Nothing like poking fun at men with small penises... (although I'm sure I'd have been laughing too
Personally, I have never gone out with someone into body building so I couldn't tell you if there is any correlation between their penis size and their muscle size. But the stereotype has always been there, like you said, about how the guy with the ridiculous sports car, or giant muscles "must be compensating for something".
Ultimately though, assuming he is compensating for his penis - instead of some other perceived inadequacy like intelligence, income, height, hair, god who knows - is open to debate. Saying it's compensating for his penis just gets the biggest laugh because it's the cruelest.