Yes, the Stone Hammer should only upgrade up to Cobblestone. Later, you'll encounter a similar issue with Titanium blocks (Only the Titanium Hammer upgrades up to this, last I checked). Personally I really like the limitation on Stone Hammer since that way I don't waste concrete when I'm in a hurry. I usually go from Stone Hammer to Nailgun (I've usually unlocked Labourer by the time I'm going for Concrete), but Claw Hammer works.
@KhaineGB
I just noticed the photo of Sir Honkers in the download. I approve. I've no idea if it's in the game (maybe a sign's URL?), but worthy.