Aerospace stocks have soared this year, mainly because of a rash of takeovers. But one defense stock has been adrift: Litton Industries (LIT).

''Litton underperformed the S&P Composite in 1995, 1996, and, so far, 1997,'' says Byron Callan of Merrill Lynch. But is it time to give up? Not at all, says Callan, who thinks something will ultimately jog the stock. ''Either better earnings or a strategic event'' could unlock Litton's worth, he argues.

That event could be a buyout. In recent weeks, Litton has perked up from 45 a share to 50. One investment manager reckons General Dynamics will make a bid for Litton, which he thinks is worth 80 in a buyout. Both Litton, with a market capitalization of $2.3 billion, and General Dynamics, nearly $5 billion, need such a deal, he observes, ''if they are to survive in the consolidating aerospace-and-defense industry.''

Litton is a leader in defense electronics, radar devices, computer components, integrated circuits, avionic instruments, and combat ships.

General Dynamics builds submarines and tanks. The company has been in an acquisition mode: In early 1997, it acquired Lockheed Martin's armament and defense systems, and in 1996 it bought Bath Iron Works and Teledyne's vehicle systems. General Dynamics derives almost all of its revenues from U.S. government contracts. Litton gets 70% of its sales from the government. Litton's goal, say analysts, is to boost the commercial component of its sales from 30% to 50%.

Analyst Joseph Campbell of Lehman Brothers says: ''Litton is among the few remaining defense targets.'' He notes that, despite double-digit earnings growth, continual share buybacks, and acquisitions, Litton is ''one of the cheapest stocks in our universe.'' Litton's businesses, he adds, are all in leadership positions. The stock trades at a price-earnings ratio of 11.8 on his 1998 earnings estimate. Its peers trade at multiples of 13 to 17.